Vanguard’s foray into China founders

After abandoning plans for its own mutual fund company in China in 2021, Vanguard aimed to put teething problems in the country behind it by doubling down on a widely envied partnership with local financial group Ant.

The venture between the world’s second largest asset manager and China’s best-known digital finance business soon attracted the interest and investments of more than 1mn customers on the mainland, in an encouraging sign of the growth prospects in a multi-trillion-dollar investment market.

Fast forward to 2023 and it is unclear whether Vanguard will have any mainland Chinese customers in future. The US-based $8tn fund manager last month briefed the country’s securities watchdog and the Shanghai government on a planned exit from the venture, according to three people familiar with the matter.

In a statement, the joint venture said the co-operation between its shareholders had not changed and that business was running as normal. China’s Securities and Regulatory Commission and the Shanghai government did not comment, while Ant Group itself said its joint venture with Vanguard was operating as usual and declined to comment on “market speculation”.

Whether or not Vanguard makes a complete exit from the market, the difficulties faced by one of America’s most vaunted investment firms in China — in everything from the products it sells to how it brands and distributes them — highlight the challenge facing the world’s leading asset managers as they rush to expand in the country.

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China is still in the early stages of building out its private pensions system and has increased access for US firms in recent years, even as geopolitical relations between the two countries have worsened. Instead, sources said, any obstacles have been largely commercial.

Vanguard’s venture with Ant was first set up in 2019, two years after it arrived in China, with the US fund owning a 49 per cent stake. It was the first of its kind to be granted a so-called robo-advisory licence from the China Securities Regulatory Commission, which allowed it to provide a form of automated financial advice.

In the US, Vanguard has helped pioneer low-cost products over recent decades that track major indices. Its plan in China was to provide investors with similar cheap and passive exposure to the markets. Clients needed only Rmb800 ($116) to set up an account, which was lowered to Rmb100 in July 2021, a few months after Vanguard abandoned plans for its own mutual fund business to focus on the JV.

But two people familiar with the product design said that a limited pool of underlying securities in China and minimal access to offshore markets made it hard for the model to perform well. Its fees did not stand out compared to the commission-based structure adopted by mutual funds elsewhere in China, one of the people said.

Analysts also suggested that the Chinese consumer mindset, widely associated with a desire for high returns and speculation on the country’s stock markets, conflicted with a strategy of passive exposure that has seen widespread success in more mature financial markets.

Liu Meng, an analyst with consultancy Forrester, pointed to a survey that showed as many as 90 per cent of Chinese retail investors make their own investment decisions rather than rely on passive exposure or third-party advice. He added that China’s development of the robo-advisory business lags behind that of the US.

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A person familiar with the JV’s operation in Shanghai said Vanguard was reluctant to deviate from its plan of low-cost index funds that were sold directly to retail clients, especially following the appointment of Tim Buckley as global chief executive in 2018. The person added the venture was weighed down by the cost of senior executives dispatched from the US, with the chief investment officer alone costing it over $1mn a year. “It’s an expensive burden for a start-up like us,” the person said.

Meanwhile, on the other side of the venture, Ant, which owns China’s Alipay payment app with over 1bn users, failed to promote the venture’s products as much as had been hoped. A wave of regulatory and anti-monopoly pressure from Beijing on China’s top tech companies, which also derailed Ant’s plans for a record-breaking US IPO in 2020, forced it to promote similar products from other fund houses.

Peter Alexander, managing director with investment consultancy Z-Ben Advisors in Shanghai, suggested that foreign asset managers often relied too heavily on the assumption that local partnerships would successfully distribute their products in China, where he says investors are “completely agnostic to brand”.

“China has arguably the most open architecture on distribution anywhere in the world. Anyone can put any product on any platform,” he said. “That’s not your problem. Your problem is: how do you stand out?”

“You need to have something to market, you need to say we’ve got great performance, or we’ve got great client service,” Alexander added.

Geopolitical tensions have also cast a pall over foreign businesses in China in recent months. In Washington, the focal point of US scrutiny has so far been the semiconductor industry, rather than financial services, though business leaders across industries kept an unusually low profile at a recent forum in Beijing.

Even in the absence of any geopolitical disruptions, the failures of Vanguard’s approach emphasise how, in the investment sphere, American business success does not necessarily translate for the Chinese market.

“If you’ve been successful on a global scale, there are ways to bring that DNA to the China market,” said Alexander. “It just takes a shift in thinking about how to go about doing that. Nobody that I can see at this point is really there.”

Additional reporting by Brooke Masters in New York and Andy Lin in Hong Kong