Vanguard and Ant Financial have formed an intriguing partnership that allies two of the world’s most powerful financial players in a bold initiative to tackle the fastest growing investment market.
International asset managers are racing to strengthen their operations in mainland China, where the pool of assets is forecast to increase from $5.3tn to $9.3tn as early as 2023, according to Morgan Stanley and Oliver Wyman, the consultancy.
This growth offers the tantalising prospect of a lucrative stream of profits for those international managers that can negotiate the complex mix of regulatory, operational and cultural challenges posed by doing business in China.
Pennsylvania-based Vanguard has just agreed an investment advisory joint venture with Ant, a subsidiary of the Chinese ecommerce group Alibaba, as part of a China government-backed pilot scheme designed to drive up the adoption of mutual funds.
Vanguard, the world’s second largest asset manager, has used its core message about the importance of keeping investment costs low to build an army of more than 20m clients worldwide. But this is dwarfed by Ant’s technology platform, which provides access to 700m potential investors across China.
Ant is gradually opening up its platform, which allows investors to shift money from online bank accounts into investment funds to third-party asset managers. The decision to widen the range of products available on the platform was made to head off the potential for systemic risks developing on the back of Ant’s success in attracting inflows into a money-market fund known as Yu’e Bao or leftover treasure. Assets held in Yu’e Bao reached a peak of about $250bn in 2018, illustrating the power of Ant’s technology to drive investor inflows.
Invesco, the Atlanta-based asset manager, has seen assets managed by its local joint venture, Invesco Great Wall, quadruple to $31.5bn since one of its funds was added to Ant’s platform last year.
Details of the agreement between Vanguard and Ant are scarce as neither company is prepared to discuss its objectives before the official launch announcement later this year. But the partnership has captured the attention of industry watchers worldwide.
“Vanguard will be able to leapfrog its business to the forefront of investors’ minds by partnering with one of the best brand names in the retail market in China,” says Stewart Aldcroft, Asia chairman of CitiTrust, the Hong Kong securities and fund services arm of US bank Citigroup.
The Vanguard-Ant joint venture is expected to target the “mass affluent” sector of the market instead of the rich investors serviced by established wealth managers, such as Noah and CreditEase.
It remains unclear whether the services offered by the joint venture will be purely advisory or whether assets might be run on a discretionary basis where portfolio choices are made by the investment manager, which would command higher fees.
It is also uncertain which type of products will be available to the clients. While basic products will probably be offered initially, there is no reason why more sophisticated choices, such as Vanguard’s exchange traded funds, could not feature on the menu.
Regulators in Beijing are determined to transform standards across China’s immature asset management industry, which has existed for around only 20 years, with the help of international players.
Local supervisors want to encourage investors to use funds more widely as portfolio building blocks instead of individual stocks or wealth management products issued by banks that carry guaranteed payments and promises of unrealistically high returns.
The introduction of stricter rules in 2018 covering wealth management products led to an increase in demand for money market funds and ETFs last year.
Mr Aldcroft says that mainland regulators have yet to formalise detailed rules for the provision of wealth management services, in contrast to the fund management and banking sectors, where the regulatory framework is more comprehensive.
“The questions surrounding the types of products selected by wealth managers along with ‘know your client’ standards and anti-money laundering protocols all need to be developed into a single set of regulations and perhaps a code of conduct,” says Mr Aldcroft.
Vanguard set up a representative office in Beijing in 2014 and established a wholly foreign owned enterprise (WFOE) — a local regulated entity — in Shanghai in 2017. The WFOE has yet to launch any funds, which has led some observers to question if Vanguard’s historic policy of proceeding cautiously when entering new markets has left it lagging behind some of its more adventurous US peers in China.
Peter Alexander, managing director at Z-Ben, a Shanghai consultancy, questions Vanguard’s strategy in agreeing to take a minority position (49 per cent) of an equity joint venture partnership with Ant.
Mr Alexander says he is surprised at this decision as it would be possible to pursue the same objectives through a contractual relationship that would be easier to exit than an equity joint venture if either party fails to live up to its side of the bargain.
He warns that similar equity joint venture partnerships have not worked as expected, pointing to the example of the alliance between Russell Investment and Ping An, the insurance company, which ended after just four years in 2015.
“An equity joint venture is essentially all about the Chinese ensuring outright control. No matter how commercially viable a partnership between Ant Financial and Vanguard may be, the choice to create that relationship as an equity joint venture will most likely lead to failure,” warns Mr Alexander.
Mr Aldcroft disagrees, saying the joint venture will open a “whole new area of development” for mainland Chinese fund management and wealth management distribution businesses.
Six other fund companies are understood to be participating in the one-year pilot scheme, with the China Securities Regulatory Commission expected to issue official advisory licences at the end of the test period next year.