Vanguard, the world's second biggest asset manager, is looking at ways to grow its business in China, which are likely to include setting up a wholly foreign-owned enterprise (WFOE) and another representative office.
“It would not be surprising if we do that [open a WFOE],” chief executive Bill McNabb told AsianInvestor during a select meeting of Hong Kong and Chinese press at the US firm’s Pennsylvania headquarters.
While Vanguard is interested in creating its own mainland fund operation, he did not think a joint venture was likely. “Never say never to anything, but it’s hard for us to do that due to our legal structure,” he said. “Joint ventures are not in our DNA; we like to be independent.”
The firm, with $3.8 trillion under management, has other plans, potentially including a Shanghai rep office to add to the one in Beijing and its setup in Hong Kong, he noted.
McNabb said he was optimistic about the Chinese market, in light of the regulatory changes to come in the next several years.
Vanguard has been keen to build its mainland allocation. The firm added A-shares to its Emerging Markets Stock Index Fund last year and completed the transition of its Vanguard FTSE Emerging Markets ETF to track a new FTSE index that includes A-shares in September. Moreover, its Australian subsidiary was handed Rmb20 billion ($3 billion) in renminbi qualified foreign institutional investor (RQFII) quota in January this year, the largest ever single award to a foreign institution.
More broadly, Vanguard has been heavily focusing on getting people to save more for retirement, said McNabb, and Chinese regulators are very interested in overseas retirement scheme developments, especially in the defined contribution (DC) sector.
“The last time I was in Beijing and talked to different policymakers, they all had really deep understanding of all the DC systems around the world and wanted to talk about what was good about the UK, Australian and Chilean systems,” he added.
Beyond China, Vanguard is keen to build its presence internationally and increasingly in Asia, where it boasts sizeable businesses in Australia and Japan, but relatively low penetration in other markets. For example, the company offers no fixed income funds at all in Hong Kong and has only five ETFs listed there, something it would like to change.
“We have spent a lot of time talking to the folks in the MPF [Hong Kong’s Mandatory Provident Fund Authority],” said McNabb. Vanguard has a couple of products offered under the scheme and is exploring further opportunities, he added.
While higher saving rates in countries such as China mean a lot of potential business, the traditional preference for stock trading – particularly among retail investors – means Vanguard has its work cut out to build AUM.
A further challenge is that passive index products do not typically pay commissions to distributors in order to keep costs low. This makes it challenging for Vanguard's index funds and ETFs to break into Asian markets.
A long road
McNabb is under no illusions that it will be quick or simple. “The retail market, in particular in China and Hong Kong, has much more speculative nature than here [in the US],” he noted.
“Our mission is to get our story out there; it hasn’t happened overnight [in the US] – it took a long time," he added. “We introduced the first index fund in 1976, and it was still an after-thought in 1996. In 2006 index funds were bigger and in 2016 they are a huge part of what we do.”
Passive investing has indeed gained momentum in recent years as average returns have fallen, leaving end-investors to seek ways to reduce costs to maximise performance. Asset owners have sought to invest more via passive index funds, which charge extremely low fees for their services. Fidelity's 500 Index Fund, for example, charges nine basis points in annual fees.
Vanguard's longstanding commitment to ultra-low-cost passive investing has left it in a particularly beneficial spot. Its AUM has nearly doubled from $2 trillion in 2013.
That has come even as the assets of fund managers that focus on active investing has fallen. And that in turn has meant that rivals such as Fidelity have been cutting fees on their own index funds, in some cases to even lower levels than those offered by Vanguard.