Vanguard is one of the world’s largest asset management companies. The firm has built a $7.2 trillion asset management empire by selling low-cost index funds to individual investors, primarily in North America. However, the company has struggled to grow its business in Asia. Passive investing in Exchange Traded Index Funds (such as the S&P 500 index or the Russell 2000), a strategy that was pioneered by Vanguard in the United States, remains relatively novel in Asia, where many individual investors prefer stock picking in the hope of securing higher returns. For some years, Vanguard has had a presence in Hong Kong and Japan, but it has found it tough to build business, and in 2020 the company announced it would close its offices in both of those markets. However, its business in China seems to be following a different trajectory.
Following a decision by Chinese regulators to start relaxing restrictions on foreign financial service companies doing business in China, in 2017 Vanguard set up an onshore operation in Shanghai. To grow its business there, in 2019 the company entered into a joint venture with Ant Group, which is an affiliate of the Chinese tech company Alibaba started by Jack Ma. The joint venture is 51 percent owned by Ant, and 49 percent by Vanguard.
Ant owns Allpay, which is China’s largest digital payment platform. Allpay has over 1 billion users around the world and 80 million merchants, with total payment volume reaching a staggering 118 trillion Chinese yuan in June of 2020. More than one third of China’s population, or 588 million people, contribute cash to Ant’s largest money market fund.
In April 2020, the joint venture rolled out a robo advisor that targeted the Chinese fintech firm’s one billion users. The venture started offering an automated service called “Bang Ni Tou” (Help You Invest), to capture people with at least 800 yuan ($113) to place in mutual funds.
Using models developed by Vanguard, the robo adviser recommends a portfolio selected from 6,000 mutual funds, after assessing the user’s risk appetite and investment horizon.
For a small fee, the transactions are done automatically and the robo adviser will also help investors rebalance their portfolios if necessary. According to Vanguard, the company worked with Ant to create a service that is as easy to use as possible. In the 100 days from its April 2020 launch, the service had 200,000 customers who had collectively invested more than $300 million. By the end of 2020, 500,000 Chinese retail investors had reportedly made investments using the service.
Vanguard and Ant are not alone in pursuing this strategy.
China’s robo-advisory market is expected to reach 737 billion yuan by 2022, according to a report by Lufax and consultant iResearch. Traditional financial institutions and a slew of fintech startups are also gearing up to grab market share according to the report. They include state-backed giants such as Industrial & Commercial Bank of China Ltd. and China Merchants Bank Co.
By venturing into the retail market through its joint venture with Ant, Vanguard is breaking away from the strategy pursued by other Western investment firms in China such as BlackRock Inc. These firms have for years managed money for China’s institutions, state funds, and the wealthy to build their brand and political goodwill.
They have settled for being lesser partners with Chinese banks to reach individual investors. In 2020, this longheld strategy appeared to bear fruit when Beijing began letting foreign firms apply for mutual fund licenses of their own. Still, no foreign firms have yet started selling their own mutual funds to Chinese individuals. One major problem is that they face distribution challenges, because Chinese banks and brokerages control bricks-and-mortar branches, and internet giants dominate digital channels.
Vanguard’s strategy of partnering with Ant and selling directly to retail investors represents a radically different approach to building business in China. Vanguard decided to chart a new way after months of internal debate. Vanguard’s U.S. executives wanted the firm to focus on the Chinese retail market, rather than sinking resources into big clients that often demanded white-glove service. The head of Vanguard’s Asian operations, Charles Lin, and other overseas executives argued Vanguard needed to build a name among Asian financial institutions. In 2019, Charles Lin left Vanguard, and the firm shifted its strategy. The firm exited its Chinese institutional business, informing China’s sovereignwealth fund China Investment Corp. and the agency managing China’s foreign-currency reserves that it would return their money. Vanguard also decided to shut its Hong Kong office that mainly served big clients, shifted its Asia headquarters to Shanghai, announced plans to cease Japan operations, and pared back institutional offerings in Australia.
Vanguard is clearly going all in with Ant, focusing on retail investors in China. But Vanguard must also deal with a complication. Ant was scheduled to undertake an Initial Public Offering on the Shanghai Stock Exchange in late 2020 that was on track to raise at least $34.4 billion, which would have made it the biggest IPO of all time! The IPO valued Ant at more than $300 billion, making it worth more than most Chinese and American banks. However, in November 2020 Chinese regulators stunned the global investment community by stopping Ant from pursuing the IPO. The dramatic reversal for Ant brings to a head concerns that Chinese regulators have long had about the opacity of Ant’s operations and the oversize influence it has on the Chinese payments and financial landscapes. While the precise reasons for pulling the IPO are not known, observers point to controversial comments made by Jack Ma at a public forum in Shanghai in October 2020 that some top Chinese regulators also spoke at. The comments were widely viewed as being critical of China’s financial system and the state’s role in it. The norm in China is that companies are supposed to operate within the country’s regulatory constraints and the established political system. Jack Ma may have erred by breaking that norm and directly criticizing the established order. The implications of this turn of events for the Vanguard–Ant joint venture remain to be seen.
Case Discussion Questions 1. What are the attractions of the Chinese market for Vanguard? Does it make sense for the company to participate in this market in some form? What are the risks associated with entering the market?
2. Prior to Ant’s IPO being pulled by Chinese regulators, did Ant make a good joint venture partner for Vanguard? What are the benefits of partnering with Ant, as opposed to

(a) partnering with one of China’s large state-controlled banks, or

(b) going it alone in China?
3. Vanguard’s own Asian executives favored a strategy of partnering with established financial institutions and focusing on large institutional clients (such as China’s sovereign wealth fund). They were apparently overruled by Vanguard’s senior U.S. executives, who decided to pull out of the institutional market and go after the retail market, which is composed of hundreds of millions of small investors. This strategy has worked well for Vanguard in the United States, but is it the correct strategy for China? What are the potential benefits here? What are the risks?
4. What are the implications for Vanguard of Ant’s IPO being pulled by Chinese regulators? Are there political risks here? Could those risks have been mitigated by pursuing a different strategy?
5. Given events unfolding in China, should Vanguard stay the course with Ant?