US financial giant Vanguard Group has suspended plans to launch a mutual fund business in China.
The Malvern firm, the Netherlands, told employees in recent days that it was pausing months of preparations to sell its funds to Chinese consumers. The company had planned to ask Beijing for approval of the business.
For years, the $ 7.2 trillion asset manager has sought to bring low-cost index funds to China, a radical idea in a country where investors reward funds they choose and choose investments to outperform markets. But Vanguard executives have now decided that building a significant presence in China’s fund industry would take longer than expected, according to people familiar with the matter.
The change will mean the elimination of a small number of jobs.
Vanguard’s decision contrasts with other Wall Street companies, which continue to push for Beijing’s approval to sell their own funds to Chinese consumers. Vanguard is betting that it can reach Chinese people in a different way.
Last April, Vanguard’s joint venture with Ant launched a theft advisory service that creates portfolios around the needs of individuals.
Photo:
Qilai Shen / Bloomberg News
The firm focuses its strategy in China around a company with financial technology firm Ant Group Co., which creates investment portfolios for consumers. The company adapts to Vanguard’s broader ambitions to grow by providing financial advice at a fraction of rivals ’costs. Vanguard said it believes the company can offer more value to investors by offering financial advice through the company rather than competing in a crowded fund market.
Vanguard is left out of the race to obtain a Chinese investment fund license as trade tensions between the US and China increase. The suspension of its plans by the firm makes it clear that, for all the appeal of China’s mom-and-pop market, the world’s second-largest asset manager will not come at any cost.
Vanguard will have to deal with a possible complication, as it doubles its company with Ant: The Chinese firm is under regulatory pressure and is renewing its entire business.
“We believe there is a clear opportunity to meet the growing demand for professional counseling services in China, focusing on our joint venture with Ant right now,” said Vanguard CEO Tim Buckley.
The firm said it would maintain a team in Shanghai to support the company, oversee the market and grow its business.
“Vanguard maintains its long-term commitment to the Chinese market,” Buckley said, “and is confident in its ability to continue to leverage its time-tested investment philosophy and approach to change fundamentally to improve the way how individuals in China invest. “
Since China began letting foreign companies apply for their own investment fund licenses last year, major companies have tried to prove in Beijing that they are all. BlackRock Inc.
has received preliminary approval to start a mutual fund business. Companies like Neuberger Berman and Fidelity International have pending applications.
U.S. companies face major hurdles in a market that is within reach of Beijing. No foreign company has started selling its own investment funds to Chinese people. Adding another hurdle, Chinese banks and technology giants control distribution channels.
Avant-garde executives have less clue than rivals to pursue adventures abroad with no chance of compensation. Vanguard, owned by investors of its U.S. funds, must continue to reinvest for these clients and reduce the cost of investment for its shareholders.
Vanguard told major Chinese state investors last year that it was returning its money and leaving the Chinese institutional business. The firm decided to close its Hong Kong office, which served mainly large customers, and liquidate publicly traded funds listed on Hong Kong.
Over the years, executives debated how much they were committed to expanding in China.
Vanguard gained good political will as the first proponent of the idea that investors seeking broad exposure to emerging markets should be in continental stocks. In 2015, ahead of other managers, Vanguard announced that it would add China’s A shares to its emerging market index fund.
Vanguard chief executive in about the 2017 decade, Bill McNabb, said the firm needed to devote resources to China. Mr. Buckley, another top executive, was more cautious and stressed the need for data first to justify costs, according to people familiar with Vanguard talks.
Buckley became CEO in 2018 as US-China political relations deteriorated. Vanguard took a narrower path in China and refocused the business to offer advice. Last April, the firm’s joint venture with Ant launched an automated advisory service that creates portfolios around the needs of individuals. In the first year more than 500,000 users were registered.
The firm also made other decisions that went against China’s wishes.
After Bloomberg LP increased China’s exposure to a significant bond index from April 2019, Vanguard did not reflect the full change in funds linked to the benchmark. Vanguard opted for Bloomberg for more limited exposure in China for these funds.
A firm spokeswoman said Vanguard made the decision due to limitations in the region around currency hedging and other transactions that could add costs and tracking errors for investors.
Write to Dawn Lim a [email protected]
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