‘Time to stay’: Vanguard rejig China plan in wrong direction

This is too early for Vanguard to give up on China. In a statement released on Tuesday, the low-cost fund specialist announced that it will no longer be seeking an independent license from the Chinese authorities. As a result, the company plans to reduce its workforce and focus on a joint venture with Ant Group instead. The $3 trillion industry in China is fiercely competitive, and selling passive funds is difficult. Even so, it’s time to step up your efforts.

The mutual fund industry in China is only 20 years old, and it shows it by charging high fees and having a high churn rate. Historically, long-term passive investors like those who helped make Vanguard the world’s second-largest asset manager have not been rewarded by investments in volatile instruments. Hyperactive traders who are adept at exploiting distorted markets have emerged victorious.

Vanguard may have made the decision to work with Ant in 2019 because none of that is in their wheelhouse. One of China’s largest money market funds, Yu’e Bao is run by Jack Ma’s fintech champion, who controls the country’s most popular electronic payments app. Beijing is also displeased with it.

As recently as August, Vanguard shifted its Asia headquarters from Hong Kong and Japan to Shanghai, indicating an increased focus on China. The company’s Chinese institutional business was shut down in October, and $21 billion was returned to the state’s investors. As a result, it is now retreating even further from the maturing market. A growing number of Chinese retail investors are moving from day trading to investing in professionally managed funds; those who previously kept all of their savings in cash and real estate are now embracing the stock market.

As reported by ICI Global Data, mutual fund assets grew by 70% over the next three years, outpacing the global average by a factor of nearly six. Around 2.5 trillion yuan ($380 billion) in fresh capital is expected to flow into equity and hybrid mutual funds by 2020, according to Thomas Gatley of Gavekal Dragonomics. More than 1 trillion yuan has been invested in Chinese exchange-traded funds (ETFs) since 2017. While Blackrock and Invesco have a lot of competition in the market, their past performance is not indicative of their future results.

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