For years, global money managers have been clamoring for a chance to run their own businesses in China, unshackled from local partners to gain a bigger slice of the $13 trillion investment market. Vanguard Group Inc. is going the other way.
In a surprise about face, the U.S. giant dropped its bid to set up a wholly-owned mutual fund company in China, scrapping months of planning for what a former executive said could be a $5 trillion business one day.
Instead, the firm said Tuesday it will focus on a joint venture robo adviser platform with Ant Group Co., Jack Ma’s embattled fintech giant that’s facing a regulatory crackdown to overhaul its business and create more competition.
The pivot underscores the challenges facing global firms as they try to navigate China’s $45 trillion financial services market, where entrenched local competition, low brand recognition and joint venture limitations have hampered expansion plans.
“It won’t be easy for Vanguard to replicate the success of its low-cost strategy in China even though exchange-traded funds have expanded rapidly in recent years,” said Fuxin Wang, a senior analyst with Shanghai Securities Co., citing a lack of competitive edge for the U.S. money manager.
Market Share
A year after foreign firms were given the green light to shed their local partners -- and decades since Wall Street firms first entered the China market -- they remain dwarfed in the asset management space by domestic banks and brokerages.
Funds backed by international firms raised less than half the $967 billion haul of their 100-plus Chinese rivals in the first eight months of 2020, according to data compiled by Morningstar Inc. and Bloomberg. Of the top 10 biggest funds raised, only two were backed by foreign companies.
Z-Ben Advisors Ltd., a Shanghai-based consultancy, last year lowered its forecast for foreign companies’ market share in China’s mutual fund industry by 10 percentage points to just 15% by 2030.
To be sure, many Wall Street firms are banking on the chance to run their own fund units to gain market share in the $3.2 trillion mutual fund industry. BlackRock Inc. was the first global firm to win approval for a 100%-owned money manager last year. More than 40 companies have set up joint ventures and some have applied for greater control. UBS Group AG has said it’s weighing options to expand, including taking full control of its Chinese joint venture.
Vanguard was expected to do the same, planning to apply for its own mutual fund business to pitch the low-cost index funds that have turned the Malvern, Pennsylvania-based firm into a $7 trillion global juggernaut.
Vanguard’s Asia CEO Charles Lin said in a July 2018 interview with China’s Securities Times that the enormous size and potential of the Chinese market meant that the firm’s assets under management could eventually grow to $5 trillion. After inking the deal with Ant in 2019, Lin abruptly resigned later that year, followed by at least 10 senior executive departures, including staff in legal affairs, human resources, risk management and sales.
The passive model that has made Vanguard so successful was always going to be a tougher sell in China, where the stock market is dominated by fast-trading retail investors latching on to the latest craze. The buy-and-hold mantra of index investing is growing, but remains a small part of the China market.
Active Funds
Global giants like Vanguard and rival BlackRock need to tap the boom in active funds, where market inefficiencies still allow managers to capture above average returns, according to Peter Alexander, managing director of Z-Ben Advisors.
“If they’re doing anything on the passive side, it will fail,” he said in an interview.
Vanguard CEO Tim Buckley, who took over in 2018, has shown less enthusiasm for Asian expansion.
The world’s second-biggest money manager withdrew from Japan and Hong Kong last year to focus on retail investors in faster-growing parts of the region, the company said. The changes impacted 70 positions in the two markets.
Vanguard also returned about $21 billion in managed assets to government clients in China as part of a global shift to low-cost funds for individuals, people familiar with the matter said in October.
Vanguard and other U.S. firms also face a minefield of geopolitical tensions between Washington and Beijing. Vanguard said in January it liquidated its holdings of U.S.-sanctioned Chinese companies, complying with a November executive order from former President Donald Trump.
Vanguard is now taking a step back from the stand-alone fund unit and will focus on a robo adviser platform rolled out last year with Ant to target the fintech firm’s more than 1 billions users.
Luo Dengpan, the former CEO of Dacheng Fund Management Co. who was hired last year to head the fund business, will stay on to lead the remaining team in Shanghai and support the joint venture, the company said. A “small number” of staff members who were working on the mutual fund strategy were let go.
The platform started offering an automated service called “Bang Ni Tou” (Help You Invest) in April, targeting clients with at least 800 yuan ($113) to invest.
New Customers
Bang Ni Tou’s client base almost doubled to 940,000 at the end of February from about 500,000 at the end of last year, as retail investors plowed into mutual funds amid a stocks rally, according to a person with knowledge of the matter, who asked not to be identified as the details aren’t public. The assets under management jumped 60% during the same period to 6.9 billion yuan, the person said.
The robo adviser recommends a portfolio selected from 6,000 mutual funds, after assessing the user’s risk appetite and investment horizon.
“We are confident that we can bring additional value to Chinese investors through the JV advisory service,” Vanguard said in a statement Tuesday. “We also remain committed to China as a market for us in the long-term.”
China’s robo-advisory market is expected to reach 737 billion yuan by 2022, according to a report by Lufax and consultant iResearch. Traditional financial institutions and a slew of fintech startups are gearing up to grab market share, including state-backed giants such as Industrial & Commercial Bank of China Ltd., according to the report.
While Alexander called Vanguard’s tie-up with Ant a “beautiful relationship,” he cautioned on the feasibility of joint ventures, especially since China now allows full foreign ownership. An equity-based “marriage” lacks strong constraints on the Chinese partner to deliver, he said, citing an earlier joint venture between Ping An Insurance (Group) Co. and Russell Investments that ended in 2015.
This article originally appeared on Yahoo! Finance.
