Vanguard adds China A shares to EM fund

Vanguard is to add China A shares to the world’s largest emerging market equity fund, which could lead more managers to follow suit.

The important move comes after index provider FTSE last week launched new indices to facilitate a transition to China A shares in investors’ portfolios.

Meanwhile the head of Hong Kong’s securities regulator has publicly stated it is inevitable that index provider MSCI will eventually include A shares in its own indices.

US-based Vanguard, the world’s second-biggest fund house and ETF provider, will include A shares in its emerging-market stock index fund and exchange-traded fund shares, which combined were worth $69 billion at the end of April. The inclusion will start in the fourth quarter, while the process will take place over a 12-month period.

After the inclusion, the fund will gain exposure to 1,411 China stocks which represent 5.6% of the new FTSE Emerging Market all-cap China A Inclusion index.

“Adding A-share and all-cap exposure will provide investors with broader diversification by offering more comprehensive exposure to emerging markets shares,” said Rodney Comegys, Vanguard’s head of investment for Asia Pacific, in a statement yesterday.

The inclusion comes after FTSE Russell launched two new versions of its emerging market indices to facilitate a transition for asset managers who want to gain exposure to China onshore A shares. Last week the index provider hinted that a number of its clients were planning to include A shares in the emerging portfolios before adding to their global portfolios, as reported.

Vanguard has been able to do this thanks to Chinese regulators’ – the China Securities Regulatory Commission (CSRC) and State Administration of Foreign Exchange (Safe) – approval of its RQFII licence in March and an Rmb10 billion ($1.6 billion) quota in April. The licence and quota were awarded to Vanguard’s Australian office.

“This is a very positive development. We all know China will become an increasingly larger proportion of these indices, so the sooner managers start to include them the better,” said Stewart Aldcroft, Hong Kong-based managing director at Citi Securities and Fund Servicing. “It will build knowledge and experience and may even improve returns [to investors].”

“This is a bold move especially given the level at which China’s A shares are currently trading,” said Shanghai-based consultancy Z-Ben Advisors. “What Vanguard’s decision may also mean is that it is looking to take the first blood in the battle for emerging market flows.”

Yet, Vanguard could be a challenge to its competitors, such as BlackRock’s iShares and State Street’s SPDR, which are the world’s largest and third-largest ETF providers respectively. Presently, iShares and SPDR’s emerging market ETFs track MSCI and Standard & Poor’s benchmarks respectively. 

“Other ETF providers have to consider whether to include A shares in the benchmark in the future,” said Ivan Shi, research manager at Z-Ben.

The consultant noted that Vanguard is favourably positioned to access China through the RQFII channel as it is the largest quota holder outside of Hong Kong, while BlackRock is accessing China via multiple channels with a total of Rmb9.4 billion in RQFII and QFII quotas. State Street, on the other hand, is relatively new to the Chinese cross-border programme as it holds only Rmb1.3 billion quota in both RQFII and QFII schemes.

“Vanguard’s decision to use the new FTSE index could be a leading indicator that more asset managers will follow soon,” said Qi Wang, Hong Kong-based chief investment officer at Forward Capital Group.

Vanguard managed total assets of $3.3 trillion at the end of April, including $470 billion or 14% in ETF assets.

The move comes one week before MSCI, another global index provider, officially announces whether or not it will include A shares in its emerging market equity index.

“I’m not sure I really care what that announcement is. If you think that there’s a disappointment associated with that, I don’t think you understand the nature of this opening - it’s only a matter of deferral at worst,” said Singapore-based Adam Levinson, the founder of hedge fund Graticule Asset Management Asia, at the Sohn Conference in Hong Kong yesterday.

Later on at the conference, Ashley Alder, chief executive of the city’s Securities and Futures Commission, made a surprisingly public contribution to the will-they-won’t-they MSCI debate.

He told the conference: “At some point MSCI inclusion – as the first speaker said – will happen. It’s not a question of if, it’s just a question of when.”