Global passive funds giant Vanguard Investments' closure of its Singapore operation, announced on Wednesday, is seen by industry observers as a reflection of its struggle to attract retail investors.
That in turn is largely down to the reluctance of regional regulators to encourage fiduciary financial advice and retail funds with low distribution and management costs attached.
Vanguard’s official statement on the closure referred to a decision to "streamline on-going client service and operational activities" in the region, adding that it "will consolidate its Singapore operations and distribution activities under Vanguard Investments (Hong Kong) Limited in Hong Kong.”
Blair Pickerell, an Asian funds industry veteran, told AsianInvestor it appeared that Vanguard was committed to consolidating on the backbone of its business — selling passive funds to large institutional investors.
Stewart Aldcroft, managing director and senior adviser for Citi Global Transaction Services, agreed that shuttering Singapore operations was sensible, given Vanguard's struggle to sell exchange-traded funds (ETFs) there.
“Recently launched Reit ETFs have done well, offering an income substitute," said Aldcroft. "The scale of Singapore’s market is small though, whereas in Hong Kong the potential of China, with ETF Connect and other factors, will encourage many firms to consolidate business there.”
He noted Vanguard's Asian-listed ETF sales “are not as successful as they would like, [but] they have been very successful in their overall sales of ETFs, mainly those listed in Dublin, as well as index funds. Also, in Hong Kong, they have been successful with their DIS product being used widely in MPF products.”
Vanguard launched the first index-tracking fund in 1974, and has since become the US’s second-largest asset manager after BlackRock. It did so in part by relying on outspoken former CEO Jack Bogle.
“Bogle [who stepped down as Vanguard CEO in 1996] did a great job of proselytising about passive investing in the US. They need someone doing this for them in Asia," an Asian industry observer told AsianInvestor.
He added that Vanguard needed more managerial experience from the region than people brought in from the US headquarters.
The company has faced other issues since it launched its first Asia-listed ETF five years ago, principally how to sell retail funds without paying commissions, in a region that revolves around doing so.
Most funds are sold via commercial bank and private bank salespeople, and their employers "charge significant front-end loads in order to cover the costs of branches, salespeople, systems, and compliance," said Pickerell.
The salespeople typically sell funds that provide the most commission; 'no-load' funds, such as Vanguard's, are not popular. Compounding this, investors don't tend to understand how much front-load funds cost them. Shelly Painter, Vanguard's managing director for Asia in 2013, complained that investors were being misled into believing they were not paying a fee for the products they bought from advisers.
“There is no meaningful no-load fund industry in much of Asia, particularly in the major markets of Hong Kong and Singapore. Few investors hunt around looking for good funds with low fees, like they do in the US," said Pickerell.
Tobias Bland, managing director of ETF specialist fund manager EIP in Hong Kong, argued that no-load funds and fee-based advice will struggle in Hong Kong and Singapore until financial regulators force financial advisers to act in the fiduciary interest of their clients.
"The MAS (Monetary Authority of Singapore) and the SFC (Securities and Futures Commission of Hong Kong) both have some deluded idea that Asian investors will not pay for advice or learn to invest individually," he told AsianInvestor.
Vanguard's spokesman told AsianInvestor it remains fully committed to Asia and has no plans to close other offices. It has operations in Beijing, Brisbane, Hong Kong, Melbourne, Shanghai, Sydney and Tokyo.
Jessica Cutrera, a passive fund specialist and managing director at Capital Company, agreed the closure was unlikely to herald a withdrawal from Asia. So did Aldcroft.
It appears committed. Speaking in 2017, Vanguard's global chief executive Bill McNabb said the $5.1 trillion AUM firm wanted to build its presence in Asia, where it boasts sizeable businesses in Australia and Japan, but has relatively low penetration in other markets. As of March 31, 2018, the contracted assets under management for Vanguard managed in Singapore was $37.5 billion.
Vanguard also received a licence for an onshore wholly foreign-owned entity (WFOE) in late 2016 and opened an office in Shanghai in May last year. It has not so far sought a private fund company licence, but in January 2016 its Australian subsidiary received a Rmb20 billion ($3 billion) renminbi qualified foreign institutional investor (RQFII) quota, the largest ever single award to a foreign institution.
Vanguard has 15 restricted funds on the Singapore funds platform CISnet available to accredited investors in Singapore, and said it intends to maintain them. Meanwhile, the on-going account and relationships of Vanguard Investments Singapore will be consolidated into Hong Kong by around the end of 2018.
The company was tight-lipped about the future of its 11 Singapore-based staff, which include Richard Wane, head of Singapore, Heston Goh, head of institutional sales for Southeast Asia and Steven Chua, head of intermediary sales for Singapore
“Redeployment options for the Singapore office employees within the Vanguard group in other locations are possible and could be considered. However, at this time it would be premature to speculate," said the spokesman.
Indira Vergis contributed to this story