Vanguard plants flag in China with active equity fund

The Vanguard Group has filed an initial registration statement with the Securities and Exchange Commission to launch the Vanguard China Select Stock Fund early next year.

According to the filing, the fund will invest in both onshore and offshore Chinese equities and is intended for clients seeking actively managed, high-alpha-target equity exposure.

The actively managed single-country fund is described by one analyst as a “significant departure” for the asset management behemoth known for passively managed, broad market index funds.

Jeff DeMaso, director of research at Adviser Investments, said Vanguard is “claiming the managers they’ve chosen, Wellington Management and Baillie Gifford, boast track records of outperformance in Chinese equity markets.”

“Vanguard never boasts about managers’ historical track records; in fact, they never mention them at all,” DeMaso said. “Notably, Vanguard focuses on risk and alpha as well as performance in their press release. This is a big change.”

 In a statement Monday morning, Vanguard described exposure to China as an “important part of both equity and fixed income allocations of a globally diversified portfolio.”

“China is a significant and growing portion of the global equity market, representing the second largest nation by GDP output and the third largest country by market capitalization,” the statement read.

The new fund will seek to outperform the MSCI China All Shares Index and have estimated expense ratios of 0.83% for Investor Shares and 0.73% for Admiral Shares, compared with an average expense ratio of 1.14% for competing funds.

“Vanguard has continued to enhance its active equity lineup by partnering with top-tier external investment advisers who provide access to sound investment strategies and expert portfolio manager talent,” Kaitlyn Caughlin, head of Vanguard Portfolio Review Department, said in a prepared statement. “Vanguard research indicates that there is an opportunity for talented active managers to generate alpha in China’s large, but inefficient, equity market.”

According to DeMaso, Vanguard has historically not gone more granular than regional fund exposure.

“But the times are a changing at Vanguard,” he said. “It looks like Vanguard has partnered with some talented managers in its first foray into a stand-alone country fund. I think the fund will prove popular, though investors may be hesitant to take on the risks of this China-only strategy. We’ll have to see.”