Vanguard's local market entry strengthens mutual fund sector

US-based investment company Vanguard Group Inc launched its wholly foreign-owned enterprise in the China (Shanghai) Free Trade Zone on Thursday.

The world's largest mutual fund firm in terms of assets under management is the latest entrant to China's capital market through the WFOE route. Its entry suggests measures to open up the market may be paying off.

The new entity enables Vanguard, which has assets worth $4.2 trillion under its management, to bring its investment philosophy to China's vast number of investors, the company said.

William McNabb, CEO of Vanguard, said the firm plans to triple its staff in Shanghai to 15 by the end of this year.

He said the decision to establish WFOE shows the firm's long-term commitment to the China market, despite short-term market volatility.

Charles Lin, managing director of Vanguard's China unit, said the firm believes that China's retail investment market will be a significant growth driver, given the fast-growing demand for retirement plans and pension funds.

According to Wang Zengwu, a researcher with the Chinese Academy of Social Sciences, Chinese investable assets are estimated to be between 149 trillion yuan ($21.71 trillion) and 242 trillion yuan, and expected to grow to between 356 trillion yuan and 474 trillion yuan by 2020.

Currently, most of the assets are in the form of bank deposits and residential properties, while investments in funds and trusts constitute a minority.

"We believe that in China, mutual funds' market size will grow from $1.5 trillion now to $16 trillion in 2025," said Lin.

China's securities regulator and asset management regulator had jointly announced the WFOE policy to allow access to various Chinese investment segments to foreign businesses.

Since then, dozens of WFOEs have reportedly applied to establish private fund management firms in China.

A research note from China Merchants Securities Co said a higher number of WFOEs would mean that China's capital market will have more options, and a wider range of products, creating more opportunities for investors to own different kinds of assets.

WFOEs wanting to establish private fund management firms are going to be patient, said Lawrence Au, executive adviser for Asia-Pacific with BNP Parisbas Securities Services, in an interview earlier this month.