Vanguard China Select Stock Fund

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Northern Flicker
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Re: Vanguard China Select Stock Fund

Post by Northern Flicker »

Woodspinner wrote: A number of China Portfolio Managers claim that the US listed companies are far more risky (due to LESS oversight) than the ones on the China exchange.
It's complicated. US-listed securities for Chinese companies provide a stronger legal protection but a weaker structure-- better protection of the rights you have but less of the rights. China-listed shares offer a stronger structure, but weaker protection of the rights that you have.

As an example, one principle of US securities law is that all investors holding the same security have the same claims and same rights to whatever assets the security is for. If a hedge fund sues an entity for securities fraud and prevails, everyone holding the same security in question will get the same deal.

My understanding is that Chinese securities law is different in that regard. Each shareholder must bring their own suit to a Chinese court, and different outcomes may be adjudicated for different owners of the same security.

I believe that diversification is the key to risk management with EM equities. The problem with active management to look under the hood to try to manage risk is that the legal and regulatory frameworks are more easily modified in EM countries so the risks are not static and transparent. I thus am a believer in cap-weighted market indices broadly diversified across EM countries for EM exposure (or such exposure contained in a total int'l index).
Parkinglotracer
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Location: Upstate NY

Re: Vanguard China Select Stock Fund

Post by Parkinglotracer »

Caduceus wrote: Thu Dec 02, 2021 7:52 am
Parkinglotracer wrote: Thu Dec 02, 2021 4:17 am
If you have any good suggestions on Chinese stocks / investments to consider owning (or domestic ones for that matter) where the reward may outweigh the risk let me know and I will add them to my research list for investment. While we can’t predict the future, I use NAIC and betterinvesting.org green sheets that were made popular with investment clubs for historical data research.
I've written in other posts that I have some money invested in Alibaba, and I've explained why. But I would never "recommend" that stock to anyone, because I think it fails the definition of an "investment" in the sense that Ben Graham defined it. Ben Graham defined investment - as opposed to speculation - as an enterprise in which there would be no/little risk of permanent impairment of capital. I think Alibaba fails that test. You can think of a number of situations in which you could lose all or substantial amounts of your invested money in Alibaba. Alibaba also fails the test of being an "investment" in the sense that you cannot have a "margin of safety" the way that value investors describe it. You can be right about Alibaba's value, and it would not matter because your wealth can be effectively confiscated by a foreign government.

I'm tempted only because there is no reasonable valuation framework under which Alibaba is worth only $130 per share, if not for the political risks. It is like Amazon, except Alibaba captures something like 25% of disposable income spending while Amazon captures something like 6% of it. It is like Paypal, except it operates in a country with not as strong of a credit card culture, so it's really also like Visa/Mastercard, and together with Tencent, one of two companies that dominates the payments landscape. I mean, when you do a sum-of-its-parts analysis, and you subtract its cash on hand (less debt) from its market cap, subtract the fair value of its investments in associates, its marketable securities, you're getting the underlying businesses - and those are some quite strong businesses indeed - for a fairly insane price.

But again, like Ben Graham would say, it's not an "investment" for the reason stated above.
Thank you for a great explanation - all great businesses and I hope those in power in China will see it is in their best interest to see Alibaba succeed. And of course I hope china doesn’t nationalize western investments, and sees the benefits of being a cooperative partner in the world’s economic system. maybe I will buy a couple shares for speculation!


more than ten years ago
Tinyz
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Joined: Fri Nov 19, 2021 8:59 pm

Re: Vanguard China Select Stock Fund

Post by Tinyz »

I really like Alibaba, tencent and few other China companies. They are good company. I especially like China, its a beautiful country. But as of yesterday considering of didi delist and SPEC on the lookout, I wrote off the entire region of China, Russia, middle east, parts of SEA. The risks are far too great. Now I am worry about Europe (UK diverging, EU focusing on financial). Taiwan, South Korea and Japan are also concerning me.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Vanguard China Select Stock Fund

Post by 000 »

Tinyz wrote: Thu Dec 02, 2021 9:36 pm I really like Alibaba, tencent and few other China companies. They are good company. I especially like China, its a beautiful country. But as of yesterday considering of didi delist and SPEC on the lookout, I wrote off the entire region of China, Russia, middle east, parts of SEA. The risks are far too great. Now I am worry about Europe (UK diverging, EU focusing on financial). Taiwan, South Korea and Japan are also concerning me.
Back to 100% US stocks, then, eh? :twisted:

Or maybe you're making big bets on South American stocks? 8-)
Tinyz
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Re: Vanguard China Select Stock Fund

Post by Tinyz »

000 wrote: Thu Dec 02, 2021 10:16 pm Back to 100% US stocks, then, eh? :twisted:

Or maybe you're making big bets on South American stocks? 8-)
Nah. Not a 100% US person as I still hold a belief that Europe, India and South America will get their act together but the percentage is indeed smaller now as I do not know how long it will take. Especially the Europe, I hope they restructure their Financial well and their 300 billion investment to developing countries will eventually help to improve their trade. However, I do not know how long this will take. I might as well look into India and South America more. :shock: Gotta bet big or go home, a little crazy since brazil is so dirt cheap now but 2022 will be a wild wild brazil.

It was very painful for me to cut China off. It was a beautiful country and I see it as a good place to do business with.
Northern Flicker
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Re: Vanguard China Select Stock Fund

Post by Northern Flicker »

Tinyz wrote: Thu Dec 02, 2021 11:20 pm
000 wrote: Thu Dec 02, 2021 10:16 pm Back to 100% US stocks, then, eh? :twisted:

Or maybe you're making big bets on South American stocks? 8-)
Nah. Not a 100% US person as I still hold a belief that Europe, India and South America will get their act together but the percentage is indeed smaller now as I do not know how long it will take. Especially the Europe, I hope they restructure their Financial well and their 300 billion investment to developing countries will eventually help to improve their trade. However, I do not know how long this will take. I might as well look into India and South America more. :shock: Gotta bet big or go home, a little crazy since brazil is so dirt cheap now but 2022 will be a wild wild brazil.

It was very painful for me to cut China off. It was a beautiful country and I see it as a good place to do business with.
There is no evidence that individual investors can choose successfully which countries will have outperformance of their stocks.
Dennisl
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Re: Vanguard China Select Stock Fund

Post by Dennisl »

Ignorant post. How do Chinese companies pulling out of American stock exchanges affect our holdings in international index funds? Does it matter since the funds hold the underlying company stocks regardless of the exchange?
Northern Flicker
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Re: Vanguard China Select Stock Fund

Post by Northern Flicker »

Some, maybe all are relisting the VIEs in Hong Kong. Some are even adding CDRs (Chinese Depository Receipts) so that investors in China would use a similar mechanism to invest.

On the other hand, I believe that firms blacklisted by the US govt are removed from indices by MSCI, FTSE Russell, etc.
AlwaysLearningMore
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Re: Vanguard China Select Stock Fund

Post by AlwaysLearningMore »

"Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
Robot Monster
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Joined: Sun May 05, 2019 11:23 am

Re: Vanguard China Select Stock Fund

Post by Robot Monster »

AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Bogle himself said that if he were to invest internationally, it would be in emerging markets, but not more than 5 percent. link Ostensibly, he wasn't against investing in China because of the VIE structure.
AlwaysLearningMore
Posts: 1936
Joined: Sun Jul 26, 2020 2:29 pm

Re: Vanguard China Select Stock Fund

Post by AlwaysLearningMore »

Robot Monster wrote: Sat Dec 04, 2021 3:19 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Bogle himself said that if he were to invest internationally, it would be in emerging markets, but not more than 5 percent. link Ostensibly, he wasn't against investing in China because of the VIE structure.
If there are any quotes where he drilled down that far re: non-ownership of any part of the actual Chinese company, they would be interesting to read.
I do recall many quotes where he talks about investing in businesses -- nothing akin to the VIE structure. e.g., Chapter 3 of The Little Book of Commonsense Investing (proud to say I have a copy Mr. Bogle personally autographed for me :D ) Cast Your Lot with Business. He recommends buying a portfolio that owns shares of businesses.

Here are the other current MSCI emerging markets nations. Wonder how many of the other 21 countries listed also utilize the VIE structure where US investors don't actually own any part of the company?
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Egypt
Greece
Hungary
Kuwait
Poland
Qatar
Russia
Saudi Arabia
South Africa
Turkey
United Arab Emirates
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Thailand
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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tetractys
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Location: Along the Salish Sea

Re: Vanguard China Select Stock Fund

Post by tetractys »

Vanguard has enough AUM that it may be imperative to acquire a larger share of China to support inner liquidity. If the fund is successful and grows enough Vanguard will likely add an ETF class.
Northern Flicker
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Re: Vanguard China Select Stock Fund

Post by Northern Flicker »

If so, it would become the only dual share class fund that Vanguard has that is not an index fund. I doubt we will see an ETF share class, but who knows? I would have doubted that Vanguard would even implement an active Chinese equity fund.
Northern Flicker
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Re: Vanguard China Select Stock Fund

Post by Northern Flicker »

AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever."
From the statutory prospectus of VWO:
Additionally, investing in A-shares generally increases emerging markets risk due in part to government and issuer market controls and the developing settlement and legal systems.
Vanguard seems to be saying that shares listed in China (A-shares) are the riskier of the two.
Robot Monster
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Re: Vanguard China Select Stock Fund

Post by Robot Monster »

AlwaysLearningMore wrote: Sat Dec 04, 2021 4:02 pm
Robot Monster wrote: Sat Dec 04, 2021 3:19 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Bogle himself said that if he were to invest internationally, it would be in emerging markets, but not more than 5 percent. link Ostensibly, he wasn't against investing in China because of the VIE structure.
If there are any quotes where he drilled down that far re: non-ownership of any part of the actual Chinese company, they would be interesting to read.
I do recall many quotes where he talks about investing in businesses -- nothing akin to the VIE structure. e.g., Chapter 3 of The Little Book of Commonsense Investing (proud to say I have a copy Mr. Bogle personally autographed for me :D ) Cast Your Lot with Business. He recommends buying a portfolio that owns shares of businesses.

Here are the other current MSCI emerging markets nations. Wonder how many of the other 21 countries listed also utilize the VIE structure where US investors don't actually own any part of the company?
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Egypt
Greece
Hungary
Kuwait
Poland
Qatar
Russia
Saudi Arabia
South Africa
Turkey
United Arab Emirates
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Thailand
If Bogle was against owning Chinese stocks, I don't understand how it would make sense for him to say, if I were to invest internationally, it would be in emerging markets, considering that China is by far the biggest single country allocation in the emerging markets index. Don't you think he realized his words might encourage those who are open to international investing to buy the emerging markets index, e.g. Vanguard's China-heavy VWO?
Robot Monster
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Joined: Sun May 05, 2019 11:23 am

Re: Vanguard China Select Stock Fund

Post by Robot Monster »

Northern Flicker wrote: Sat Dec 04, 2021 5:12 pm Vanguard seems to be saying that shares listed in China (A-shares) are the riskier of the two.
BlackRock appears to agree. link Go to that link, select 30 year return time period, and witness the monstrous uncertainty of China A shares in full glory.
AlwaysLearningMore
Posts: 1936
Joined: Sun Jul 26, 2020 2:29 pm

Re: Vanguard China Select Stock Fund

Post by AlwaysLearningMore »

Robot Monster wrote: Sat Dec 04, 2021 5:35 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 4:02 pm
Robot Monster wrote: Sat Dec 04, 2021 3:19 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Bogle himself said that if he were to invest internationally, it would be in emerging markets, but not more than 5 percent. link Ostensibly, he wasn't against investing in China because of the VIE structure.
If there are any quotes where he drilled down that far re: non-ownership of any part of the actual Chinese company, they would be interesting to read.
I do recall many quotes where he talks about investing in businesses -- nothing akin to the VIE structure. e.g., Chapter 3 of The Little Book of Commonsense Investing (proud to say I have a copy Mr. Bogle personally autographed for me :D ) Cast Your Lot with Business. He recommends buying a portfolio that owns shares of businesses.

Here are the other current MSCI emerging markets nations. Wonder how many of the other 21 countries listed also utilize the VIE structure where US investors don't actually own any part of the company?
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Egypt
Greece
Hungary
Kuwait
Poland
Qatar
Russia
Saudi Arabia
South Africa
Turkey
United Arab Emirates
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Thailand
If Bogle was against owning Chinese stocks, I don't understand how it would make sense for him to say, if I were to invest internationally, it would be in emerging markets, considering that China is by far the biggest single country allocation in the emerging markets index. Don't you think he realized his words might encourage those who are open to international investing to buy the emerging markets index, e.g. Vanguard's China-heavy VWO?
From what I gather that comment was made during a Bloomberg interview. On the other hand, when it came to actually offering advice to investors in his multiple books, Mr. Bogle suggests developing a portfolio that owns shares in businesses. On the other hand, China's Variable Interest Entities are a far cry from direct ownership of shares in the underlying businesses.

"On July 30, 2021, SEC Chair Gary Gensler directed the SEC staff to seek certain disclosures and engage in targeted reviews of issuers associated with China-based operating companies in order to enhance the overall quality of disclosures in SEC registration statements and filings of these issuers. Chairman Gensler’s statements follow recent restrictions and guidance issued by the Chinese government on China-based companies raising capital offshore and build on the SEC Division of Corporation Finance’s previous guidance on disclosures for China-based companies...

Under Chinese regulations, Chinese companies in a number of sectors are not permitted to have foreign investors or to list directly on a stock exchange outside China. To raise capital offshore, Chinese operating companies often use a variable interest entity (VIE) structure in which an offshore shell company enters into service contracts with the operating company and issues shares to investors in the offshore market. While neither the shell company nor the investors have any equity ownership interest in the China-based operating company, for accounting purposes, the shell company is able to consolidate the operating company into its financial statements. Chairman Gensler stated his concern that “average investors may not realize that they hold stock in a shell company rather than a China-based operating company.
https://tinyurl.com/y3fzhvqc
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: Vanguard China Select Stock Fund

Post by Robot Monster »

AlwaysLearningMore wrote: Sat Dec 04, 2021 6:01 pm
Robot Monster wrote: Sat Dec 04, 2021 5:35 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 4:02 pm
Robot Monster wrote: Sat Dec 04, 2021 3:19 pm
AlwaysLearningMore wrote: Sat Dec 04, 2021 12:59 pm "Almost every listed Chinese company we can buy outside of China is listed through a VIE structure. Through this structure investors (usually unwittingly) don’t actually own any part of the actual underlying Chinese company. While that might sound ridiculous, sadly its true. Investors who buy shares in Chinese stocks such as JD.com, Alibaba, Tencent, etc., do not technically have any ownership of the underlying business whatsoever." https://tinyurl.com/y4npjmsy

So that information is already "baked into" the price of China equities? Sorry, you can keep that cake, I buy a cake with different ingredients.
Bogle himself said that if he were to invest internationally, it would be in emerging markets, but not more than 5 percent. link Ostensibly, he wasn't against investing in China because of the VIE structure.
If there are any quotes where he drilled down that far re: non-ownership of any part of the actual Chinese company, they would be interesting to read.
I do recall many quotes where he talks about investing in businesses -- nothing akin to the VIE structure. e.g., Chapter 3 of The Little Book of Commonsense Investing (proud to say I have a copy Mr. Bogle personally autographed for me :D ) Cast Your Lot with Business. He recommends buying a portfolio that owns shares of businesses.

Here are the other current MSCI emerging markets nations. Wonder how many of the other 21 countries listed also utilize the VIE structure where US investors don't actually own any part of the company?
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Egypt
Greece
Hungary
Kuwait
Poland
Qatar
Russia
Saudi Arabia
South Africa
Turkey
United Arab Emirates
India
Indonesia
Korea
Malaysia
Philippines
Taiwan
Thailand
If Bogle was against owning Chinese stocks, I don't understand how it would make sense for him to say, if I were to invest internationally, it would be in emerging markets, considering that China is by far the biggest single country allocation in the emerging markets index. Don't you think he realized his words might encourage those who are open to international investing to buy the emerging markets index, e.g. Vanguard's China-heavy VWO?
From what I gather that comment was made during a Bloomberg interview. On the other hand, when it came to actually offering advice to investors in his multiple books, Mr. Bogle suggests developing a portfolio that owns shares in businesses.
If he was against investing in Chinese stocks, it's impossible for me to understand his comment. But...I think our points have been made. Let's agree to disagree and move on.
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