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Shock and tears: behind Vanguard’s withdrawal from the Chinese market

(Bloomberg) – Staff at Vanguard Group Inc., who made a video call from their 40th-floor office at the Shanghai World Financial Center last month, expected a stimulating speech from regional manager Scott Conking on how US fund giant Tackling the Chinese market after years of preparation. Instead, Conking said the $ 7 trillion fund manager was dropping his application for a mutual fund license. The company would rely on a consultancy firm with Ant Group Co. to maintain a presence in China, Conking said via video from the same Shanghai office, where he was visiting for the first time. More than 10 staff were fired right after Conking finished speaking, according to people familiar with the matter. An employee broke down in tears, people said, asking not to be identified as the information is private. Yet behind this seemingly hasty retirement lay years of scrutiny by Vanguard’s management as to whether his model low cost works in China, people said. The conclusion, at least for now, appears to be no and serves as a warning to other global asset managers eyeing China’s $ 13 trillion wealth market. A representative for Vanguard declined to comment. Last year in Asia, the company was yet to apply for a fund license in China, which is seen as crucial to the growth of the burgeoning wealth market. Vanguard, like other foreign players, was given the green light to apply last April, removing the need for a local partner. For some former Vanguard executives, the sky was once the limit for China. Former Asia director Charles Lin saw the potential to increase assets to around $ 5 trillion, given the pace of wealth accumulation in the world’s second largest economy. Vanguard International Affairs said in an interview in May 2018. “And we are confident that over time we can reach that scale” to make money. Enthusiasm for China began to wane under Tim Buckley, who took over as CEO in 2018, people say. Under Buckley’s leadership, the new CFO began quarterly earnings reviews for every industry and region, marking a marked shift from his predecessor Bill McNabb. Despite the huge potential in China, Vanguard does. did not apply for a fund license right away. The company raised more eyebrows in August when it announced plans to shut down operations in Hong Kong and Tokyo, affecting 70 jobs. At the time, Vanguard said that “the current dynamics of the industry” did not support its low-cost model, while citing “the considerable opportunity” in China. The U.S. company fell further in October, returning about $ 21 billion in managed assets to the government. customers in China. He also lost the mandate to manage $ 590 million in Taiwan due to poor performance. the firm more than a year to find a strong candidate for a chief compliance officer, a requirement for the license, the people said. The job offer was canceled about a month before Conking’s announcement, they said. Regulations were also a problem. As China has opened the door to foreign licenses, its requirements have been tightened, especially for global players. The regulator asked Fidelity Investments and Neuberger Berman in November to commit to providing liquidity support for the licenses they sought. This raised concerns about the additional investment costs for Vanguard, people said. A year after opening, only BlackRock Inc. has been granted a fund license. According to a November report from China International Capital Corp., foreign-controlled or wholly-owned asset managers can foreclose up to 15% of the fund. market to local rivals. over the next decade. Still, they must overcome hurdles, including a lack of distribution channels, as well as the benefits of Chinese companies as a first-mover, according to the report. Break Even Foreign asset managers need at least $ 50 billion yuan ($ 7.7 billion) of assets to make a profit, CICC analysts led by Yao Zeyu estimated. Vanguard would need more, given its extremely low fees which have boosted its growth in North America. Vanguard may have realized that “it won’t help much” even if it launched its own funds in China given the costs and its lack of competitiveness. According to Francis Chan, analyst at Bloomberg Intelligence, decades after entering the Chinese market, Wall Street companies remain eclipsed in the realm of asset management by national banks and brokerage firms. Funds backed by international companies raised less than half of the $ 967 billion in transport from their more than 100 Chinese competitors in the first eight months of 2020, according to data compiled by Morningstar Inc. and Bloomberg. advisory last year lowered its forecast for market share of foreign companies in China’s mutual fund industry by 10 percentage points to just 15% by 2030. Unlicensed in China, Vanguard will rely on its joint venture with Ant, which doubled its customer base in just two months. Assets under management jumped 60% since the end of last year to stand at 6.9 billion yuan as of February 28, a familiar person said. This puts the company on track to reach an estimated breakeven point of 10 billion yuan well ahead of its five-year target, the people said. Fund managers can dilute resources for the Vanguard business, BI’s Chan said. “It’s easy to apply, but it’s a lot harder to commit all the resources to make things work,” he said. “Having a great plan is one thing. Execution is another. For more articles like this, please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business information. © 2021 Bloomberg LP



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