Vanguard Group's decision last week to suspend its pursuit of a billion Chinese mutual fund investors reflects a business model whose time has yet to come on the mainland.
Vanguard's decision to focus instead on the joint venture it launched last April with Hangzhou-based Ant Group, offering portfolio advisory services, appeared to be the firm's only immediate way forward after Vanguard last fall stopped offering institutional separately managed accounts in the Asia-Pacific region and then concluded last week it was too soon as well to build a retail fund business there.
Structurally speaking, Vanguard's "ambition for China" — including direct-to-client sales — "is not at all where the market is at the moment," said Nicholas Omondi, director of data analytics with Shanghai-based financial sector consulting firm Z-Ben Advisors.
A Z-Ben news alert last week amplified that point: "At the heart of the matter is a fundamental disjoint between (China's) onshore market and the Vanguard business model" — an idiosyncratic situation rather than one with broader implications for foreign money managers there.
Market veterans had foreseen the chal-lenges Vanguard would face on the mainland — from the dominance there of intermediated distribution that would prove inhospitable for the firm's offerings of index strategies and exchange-traded funds to the strong ingrained preference Chinese individual investors have for actively managed products.
Even so, as recently as five or six months ago, Vanguard executives appeared confident they could overcome those obstacles.
Scott Conking, head of Vanguard Asia, said in an Oct. 16 interview that the continued opening of China's market had made the mainland's individual investor segment Vanguard's biggest opportunity to have a "positive impact on the way the world invests."
It could take considerable time to gain traction but with Vanguard ultimately owned by investors in its mutual funds, the firm was well placed to take the long-term approach needed to crack the market, Mr. Conking said.
Vanguard would take the first giant step in pursuit of that opportunity — applying for a license to set up a fund management company on the mainland — in early 2021, he said.
Five months later, those plans have evaporated, with Vanguard moving instead to focus its efforts on the 49%-51% joint venture it launched last April with digital technology powerhouse Ant, overseeing portfolios tailored to the needs of individual Chinese investors. Vanguard and Ant Group's portfolio advisory services joint venture last week said it has attracted more than 1 million users in less than a year, with the firm's client base more than doubling over the past 11 weeks alone.
"We have taken the decision to focus our resources in China on growing the JV advisory service and pause our application for a (fund management company) license," Vanguard said in an emailed statement.