Vanguard Mulls a Big Change in Japan: Selling Funds Directly
(Bloomberg) -- Vanguard Group is considering selling funds directly to investors in Japan as it seeks to crack a market that’s largely eluded it for almost two decades.
That model is in keeping with the heritage of the world’s second-largest money manager, according to Japan head David Kim. Vanguard gets only a tiny fraction of its $5 trillion in assets from the Asian country, where it currently sells through partners.
“You have to think very carefully about what’s the ability of an American company to come in, create a name essentially from scratch, create an infrastructure, gain clients and all that kind of thing. It’s certainly not impossible," said Kim. “We are passionate about it but what is the right timing; what’s the right approach; how do we do this in a way that will frankly be prudent for everyone involved?"
Any such move would be a strategic shift for the Valley Forge, Pennsylvania-based firm’s Tokyo operations, which date back to 2000. Until now, Vanguard has sold its funds through tie-ups with companies including independent mutual fund house Saison Asset Management Co., whose fund of Vanguard funds oversees about $1.45 billion.
“We have a long way to go” in Japan, Kim, 45, said in an interview at Vanguard’s Tokyo headquarters. “We can do more.”
Index-fund pioneer Vanguard faces challenges in Japan because it’s unwilling to pay commissions to fund distributors to have them sell its products, a model that’s still rife across Asia and that ultimately adds costs for investors, said Yan Pu, head of portfolio review for Asia at the money manager.
“This is a tough environment,” Pu said. “But we’re actually committed to the region. And that’s why our Japan office is growing. We understand the headwind, but we’re willing to come in to educate.”
Vanguard started selling funds directly to customers in the U.K. last year. The firm is “pleased by the reception” of its new service, it said in an emailed response, while declining to give further details. It sees an opening for this strategy in other markets such as Japan as regulations including the European Union’s revised Markets in Financial Instruments Directive, or MiFID II, require financial firms to be more transparent about costs.
Outside the U.S., Vanguard Australia has been selling funds directly to individuals for more than 20 years.
But Kim and Yan concede that any expansion won’t happen overnight in Japan, because while Vanguard is well-known in America, it isn’t always a household name in the Asian country.
“When it comes to mutual funds by Vanguard, they’re basically limited to those provided through Saison, so their market share is really not significant,” said Hiroaki Sakamoto, an analyst at fund research company Morningstar Japan K.K. in Tokyo. “The place where they have an overwhelming presence is the U.S. They’re far from that in Japan.”
In one attempt to expand in Japan, Vanguard formed a partnership last year to sell its funds through the asset management arm of Internet giant Rakuten Inc. Vanguard is open to working with more local partners, Kim said. Vanguard Japan has added employees, he said, while declining to give details on the number of additional staff.
Vanguard’s move comes as the Japanese government seeks to get people to shift more of their $8.8 trillion held in cash and deposit accounts that pay virtually no interest into the stock market. The country’s powerful financial regulator has been critical of expensive funds, which he says aren’t helping to build a culture of long-term investing.
“We feel like we can be relevant here,” Kim said of his company’s planned expansion. “Vanguard can help introduce that low-cost mindset.”
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