Caixin
Oct 21, 2020 07:43 PM
FINANCE

Chasing Individual Investors, Vanguard Ditches Chinese State Clients

Vanguard, which made its name by offering investors index funds that charge very low management fees, can make bigger profits by serving hundreds of millions of retail investors than by serving a limited number of institutional clients.
Vanguard, which made its name by offering investors index funds that charge very low management fees, can make bigger profits by serving hundreds of millions of retail investors than by serving a limited number of institutional clients.

U.S. asset management giant Vanguard Group Inc. recently returned $21.6 billion in managed assets to government and government-backed clients in China, knowledgeable sources told Caixin, as it continues its expansion on the Chinese mainland under its global strategy of focusing on individual investors.

Returning the $21.6 billion in assets shows how the company is shifting its global focus to providing funds to retail clients, and away from the more demanding and less lucrative business of managing funds for institutional investors.

The three clients — the State Administration of Foreign Exchange, the National Council for Social Security Fund, and the country’s sovereign wealth fund, China Investment Corp. — were among the first Chinese institutions to outsource the management of some of their investment funds.

A spokesperson for Vanguard in China declined to comment on the matter.

The move closely followed the ascension of Vanguard’s current chairman and CEO, Mortimer Buckley, in 2018, a source close to Vanguard’s top management team told Caixin. Buckley has worked at Vanguard since 1991, heading the company’s retail investor business from 2006 to 2012.

The money manager believes that serving institutional clients is more demanding, as they require customized wealth management products, the source said. Also, Vanguard’s management system was never designed to specifically serve institutional investors, making it more time-consuming and labor-intensive for the firm, he said.

Moreover, managing funds for institutions is less profitable than serving retail clients, the source said. Vanguard, which made its name by offering investors index funds that charge very low management fees, can make bigger profits by serving hundreds of millions of retail investors than by serving a limited number of institutional clients.

The company hinted at the move when it announced in late August that its primary office in Asia would be located in China’s eastern megacity of Shanghai, as its Hong Kong business primarily served institutional clients.

Vanguard has made other moves away from institution investors elsewhere. It has declined entrusted investments from several big institutions in Europe, the source said.

In Australia and New Zealand, Vanguard said in late September that it would close most of its business that managed money for institutional investors so it could focus more on serving individual clients. The change comes as Australia’s pension funds have moved toward managing investments on their own in an effort to lower costs, leaving a smaller portion of funds to be managed by outside asset managers like Vanguard.

This strategy shift has already paid off in Europe. At the end of March, Vanguard overtook Pacific Investment Management Co. LLC, with its assets in retail and exchange-traded funds in Europe doubling to 163 billion euros ($191.5 billion) from five years earlier, according to U.S. financial services firm Morningstar Inc.

At the same time, Vanguard has been seeking to expand its presence in the Chinese market, where there are more than 100 trillion yuan ($15 trillion) in assets under management by financial institutions.

Last year, Vanguard was approved to offer investment advisory services to retail clients in China through a joint venture with Chinese fintech behemoth Ant Group Co. Ltd., whose payment service platform Alipay has more than 1 billion users in China.

In September, Vanguard appointed former financial regulator Luo Dengpan as general manager of its planned fund management subsidiary in China, as it prepares to apply for a mutual fund license that would allow it to sell onshore products to the Chinese public.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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