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Vanguard: No rush to launch funds in China, HK

The firm has more than doubled its China staff, but not one of them is involved in investment management.
Charles Lin, Vanguard

In China, Vanguard received its investment management wholly foreign-owned enterprise (IM WFOE) licence in November 2016 and opened its Shanghai office in May 2017.

After nearly two years of operations, the headcount for the firm’s China business, which also includes an office in Beijing, has grown to 20 from just five in mid-2017, Charles Lin, who became head of Asia in addition to his head of China role late last year, told FSA.

However, the firm has not yet applied for a private fund management (PFM) licence from the Asset Management Association of China. A PFM licence allows foreign managers to offer onshore funds to China’s qualified investors.

As of end-2018, at least 15 foreign managers have PFM licences in China, including Vanguard’s chief rival Blackrock.

Plans for a PFM licence are still “on our radar”, Lin said. “I wouldn’t say we are in a waiting mode. We have actively started to evaluate the market, but we don’t have a conclusion yet.

“We usually do not rush into launching new products based on [activity of the competition] or market trends.”

Lin noted that of the 20 staff in China, no one is involved in investment management. The firm’s onshore capabilities only include market research, investor education, client servicing, finance and human resource staff.

According to Lin, the local staff has helped the firm build stronger relationships with clients, which include institutions, and regulators.

“But having investment professionals is part of our long-term plan,” he said.

Guarded approach

In Hong Kong, the world’s second largest asset manager is also relatively restrained. One-third of the firm’s $4.9trn global AUM is from actively-managed funds. But there are no plans to bring them to Asia, he said.

Since Vanguard established its Hong Kong business in 2012, it has only launched six exchange-traded funds (ETFs). By comparison, Blackrock has 13 SFC-approved ETFs for sale in Hong Kong.

Vanguard’s six ETFs — the latest was the May 2018 launch of the Total China Index ETF — cover 80% of the global equity universe, according to Lin. He noted that what’s missing is a global emerging markets equity ETF, but does not believe it is necessary to roll out another product in the near future.

“You don’t need 30 products to cover global equity exposure. You can probably buy three-four products – that’s already the majority of global equity exposure.”

Collectively, the firm’s six ETFs have HK$1.47bn ($187.71m) in assets, according to data from the Hong Kong bourse.

Vanguard’s ETFs listed in Hong Kong

ETF AUM (HK$m)
Vanguard FTSE Asia ex Japan High Dividend Yield Index ETF

303.9

Vanguard FTSE Asia ex Japan Index ETF

237.3

Vanguard FTSE Developed Europe Index ETF

217.9

Vanguard FTSE Japan Index ETF

98

Vanguard S&P 500 Index ETF

467.7

Vanguard Total China Index ETF

148.6

TOTAL

1,473.4

Source: HKEX

The firm also has reservations about listing in Hong Kong products that have been in vogue, such as smart beta or factor-based strategies, despite increasing investor interest in Asia, according to Lin, noting that the firm manages factor-based products in the US and in Europe, which are available to professional investors.

He noted that the firm’s ETF business in Hong Kong targets retail investors. Other client segments include institutions as well as private banks and independent financial advisers.

The firm also offers two balanced funds as underlying investments in the Mandatory Provident Fund’s Default Investment Strategy programme, Lin added.

Elsewhere in Asia, Vanguard has offices in Japan and Australia, which operate independently from a distribution point of view, given that both markets are very local, according to Lin.

Separately, the firm had a Singapore office, but decided to close it down last year and consolidate operational and client activities in Hong Kong.

Lin said that although certain roles were impacted, it was “not significant. We tried to look at the functions and streamline the processes and identify gaps. We wanted to increase the efficiency of our operations and at the same time reduce our costs, which should be reflected in our fund costs”, he said.

Richard Wayne, who was previously the firm’s Singapore head, now heads Vanguard’s new Dublin office, which was recently opened as part of Brexit contingency planning, according to media reports.

Part of the Bonhill Group.