Vanguard filed on Monday, November 29, an initial registration statement with the U.S. Securities and Exchange Commission to introduce the new Vanguard China Select Stock Fund. The fund will invest in both onshore and offshore Chinese equities and is designated for clients seeking actively managed, high-alpha-target equity exposure to complement a broadly diversified portfolio. Vanguard expects to launch the fund in the first quarter of 2022.
"Vanguard has continued to enhance its active equity lineup by partnering with top-tier external investment advisors who provide access to sound investment strategies and expert portfolio manager talent," said Kaitlyn Caughlin, head of Vanguard Portfolio Review Department. "Vanguard research indicates that there is an opportunity for talented active managers to generate alpha in China's large, but inefficient, equity market."
Vanguard believes that exposure to China is an important part of both the 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. With the China Select Stock Fund, Vanguard seeks to provide risk-tolerant investors with a targeted approach to exposure in the region. The 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 takes a deliberate and thoughtful approach to product development, partnering with some of the world's best managers to offer a curated range of active equity portfolios. The fund will be co-managed by long-tenured Vanguard fund advisors Wellington Management Company LLP and Baillie Gifford Overseas Ltd. Both firms have deep portfolio management experience and expertise in China and a track record of outperformance in Chinese equity markets. Vanguard's confidence in these firms is underscored by existing and successful partnerships, as well as their track records of delivering value to Vanguard shareholders.
While the fund may offer alpha potential and diversification benefits, the single-country focus may expose investors to more acute investment, geopolitical, and regulatory risks. The fund's country-specific concentration may drive higher tracking error and greater volatility relative to the broad market and therefore should be thoughtfully integrated into a globally diversified portfolio. An active approach to investing in China, coupled with the ability to invest in a wide range of both onshore and offshore Chinese equities, will provide the fund's portfolio managers flexibility to help navigate the dynamics of potential market constraints and a rapidly shifting geopolitical landscape.