Shock and Tears: Behind Vanguard’s Withdrawal From The Chinese Market

(Bloomberg) – Vanguard Group Inc. employees, who dialed a video call from their desks on the 40th floor of the Shanghai World Financial Center last month, awaited a morale speech from regional director Scott Conking on how the US fund giant would do it After years of preparation, tackling the Chinese market. Instead, Conking said the $ 7 trillion money manager has given up efforts to get a mutual fund license. The company would rely on a consulting firm with Ant Group Co. to maintain a presence in China, Conking said via video from the same Shanghai office he was visiting for the first time. The 30 or so employees were in shock. More than 10 employees were laid off after Conking finished speaking, according to people familiar with the matter. One employee burst into tears, people said, asking not to be identified as the information was private. But behind the seemingly hasty withdrawal were years of research by Vanguard’s top management as to whether the low-cost model would work in China. For now, at least, the conclusion appears to be no, and serves as a cautionary story for other global wealth managers keeping an eye on China’s $ 13 trillion wealth market. A representative for Vanguard declined to comment in Asia last year, still expected to apply for a fund license in China, which is seen as critical to growth in the burgeoning asset market. Like other foreign players, Vanguard received the green light for the application last April, so a local partner was no longer needed. For some former Vanguard executives, the sky was once the limit for China. Former head of Asia, Charles Lin, saw the potential to grow wealth to around $ 5 trillion given the pace of wealth creation in the world’s second largest economy. “We’ve been around for a hundred years, not five,” said Jim Norris, then head of Vanguard’s international business, said in an interview in May 2018. “And we’re very confident that over time we will be able to will be to reach this magnitude “in order to make money. The enthusiasm for China subsided under Tim Buckley, who, according to the population, took over the office of Chief Executive Officer in 2018. Under Buckley’s leadership, the new chief financial officer began quarterly earnings estimates for each business unit and region, a significant change from his predecessor, Bill McNabb. Despite the enormous potential in China, Vanguard did not immediately apply for a fund license. The company raised additional eyebrows in August when it announced plans to shut down stores in Hong Kong and Tokyo, affecting 70 jobs. At the time, Vanguard said that “current industry momentum” does not support the low-cost model, citing the “considerable opportunity” in China. The US company continued to back off in October by returning approximately $ 21 billion in assets under management to government clients in China. Due to poor performance, the company also lost its mandate to earn $ 590 million in Taiwan. Cost Concerns Even as China’s economy began to get out of the pandemic last year, Vanguard’s concerns about costs, sales, personnel, and regulations grew for over a year to find a strong candidate for a chief compliance officer, a requirement for the company the license, said the people. The job offer was withdrawn about a month before Conking’s announcement. The regulations are also a problem. While China has opened the door to foreign licenses, the requirements are tightening, especially for global players. The regulator asked Fidelity Investments and Neuberger Berman in November to pledge liquidity support for the licenses they applied for. That raised concerns about additional capital costs for Vanguard, people said. One year after opening, only BlackRock Inc. received a fund license. According to a report from China International Capital Corp. From November, foreign-controlled or wholly-owned asset managers can capture up to 15% of the market from local competitors over the next decade. However, they have to overcome obstacles, including a lack of sales channels and the pioneering advantages of Chinese companies, the report said. Break-EvenForeign wealth managers need at least 50 billion yuan ($ 7.7 billion) in assets to generate a profit, CICC analysts, led by Yao Zeyu, estimate. Vanguard would need more given its rock bottom fees that drove its growth in North America. Still, Lin’s team estimated that his wholly owned mutual fund business could reach 100 billion yuan in net worth in five to seven years, allowing him to break even, people said. The scenario assumed the company would sell active and passive funds, backed by its 2019 joint venture with Jack Ma’s Ant. Avantgarde may have realized that “it doesn’t help much” even if it has its own funds in China has the cost and the lack of competitive advantage, said Francis Chan, an analyst at Bloomberg Intelligence. Since Wall Street firms first entered the Chinese market, they have been dwarfed by domestic banks and brokers in the wealth management space. According to data from Morningstar Inc. and Bloomberg.Z-Ben Advisors Ltd., a Shanghai-based company, funds backed by international firms have less than half of the $ 967 billion in the first eight months of 2020 of their more than 100 Chinese competitors. Last year, the consulting firm lowered its forecast for the market share of foreign companies in the Chinese mutual fund industry by 10 percentage points to only 15% by 2030. Without a license in China, Vanguard will rely on its joint venture with Ant, which has doubled its customer base in just two months. Assets under management rose 60% from the end of last year to 6.9 billion yuan on February 28, a well-known person said. With that, the company is on track to hit an estimated 10 billion yuan break-even point, well above its five-year target. While Ant’s 1 billion Alipay users have great potential, recently launched an open advisory platform for other fund managers could dilute resources for the Vanguard company, BI’s Chan said. “It’s easy to apply, but it’s a lot harder to put all of your resources into making things work,” he said. “Having a nice plan is one thing. The execution is different. (Updates with mutual fund business break-even estimates in paragraph 17) For more articles like this, visit Subscribe us now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP