The world’s second largest asset manager has announced that it will close its Hong Kong office as part of its strategic shift to mainland China.
“Our future aspirations in Asia are to serve Chinese individual investors in mainland China, so our Shanghai office will become our primary office in Asia,” a spokeswoman told FSA.
Although some of the 50 staff in the Hong Kong office will relocate to Shanghai, the majority will be made redundant, she said.
As part of the closure, Vanguard intends to exit from its ETF operations in Hong Kong within the next 24 months, according to a filing to the Hong Kong Stock Exchange on Wednesday.
The firm will either appoint a new manager of the ETF series and each sub-fund, or terminate them entirely.
Six products are affected, including Vanguard’s FTSE Asia ex Japan, FTSE Developed Europe, FTSE Japan, FTSE Asia ex Japan High Dividend Yield, S&P 500 and Total China Index ETFs.
Vanguard will also close or transfer its Mandatory Provident Fund and Index-Tracking Collective Investment Schemes platforms.
The departure from Hong Kong had “absolutely no connection” to the controversial National Security Law imposed on the territory by Beijing this summer, said the spokeswoman.
“In fact, the decision to close the Hong Kong office predated the national security law passage, and is consistent with our longer-term strategic shift from institutionally focused businesses to products and services focused on retail investors,” she said.
“We closed our Singapore office in 2018 as part of this evolution,” she added.
Certainly, it would be perverse to shift headquarters from Hong Kong to Shanghai because of concerns about the extended reach of mainland China authority.
Instead, the decision seems to be motivated most by the firm’s ability to sell funds to retail investors.
“Unfortunately, from a distribution business standpoint, the current industry dynamics in Hong Kong are better suited to institutional investors and do not support the scale needed for us to operate the economic engine behind our low-cost, individual investor-orientated model,” said the spokeswoman.
The ETF Connect, Wealth Management Connect and MRF (mutual recognition of funds) initiatives are “all positive developments, but these opportunities do not change the decision we have made”, she added.
The Pennsylvania-based firm, which has $6.3trn in assets under management (according to its website), is a specialist provider of index-linked products, including passive mutual funds and ETFs, although up to a third of its managed assets are now active funds.
Meanwhile, Vanguard has been extending its footprint in mainland China, after little activity for two years since opening a wholly foreign-owned enterprise in Shanghai in May 2017.
Last December, it formed a joint venture with Ant Financial, owner of online platform Alipay, to advise on funds distributed to a retail market which the Asset Management Association of China estimates to be worth RMB 16.36trn ($2.3trn).
China leads direct online or third-party platform distribution in Asia-Pacific, and nearly 90% of individual mutual fund investors usually invest online, according to a recent report by Boston-based research firm Cerulli.
Vanguard believes it can contribute to the development of the country’s public fund market, “similar to the way we helped transform the mutual fund market in the US over the past four decades,” said the spokeswoman.
Vanguard is pursuing a mutual fund manager license which would enable it to offer public funds and serve retail investors directly, she added.
The firm’s head of Asia and a 36-year Vanguard veteran, Scott Conking, will eventually relocate from Hong Kong to Shanghai.
However, the Hong Kong stock market will remain a critical component for Vanguard’s global diversified funds, and the Stock Connect and Bond Connect channels will provide them access to the A-share and China bond markets, according to the spokeswoman.
“Vanguard continues to see Hong Kong as an important global financial centre and we cannot rule out the possibility of resuming services more aligned with our strategic priorities at a future date,” she said.