Management sub-advising in the mutual fund industry Articles uri icon

publication date

  • March 2018

start page

  • 567

end page

  • 587

issue

  • 3

volume

  • 127

international standard serial number (ISSN)

  • 0304-405X

electronic international standard serial number (EISSN)

  • 1879-2774

abstract

  • This is a study of how contractual mechanisms can mitigate agency conflicts in sub-advised mutual funds. Sub-advising contracts allow fund families to expand their product offerings to include new investment styles and thereby gain market share. We show that costly contractual arrangements, such as co-branding, multi-advising, and performance-based compensation, can mitigate agency conflicts in outsourcing and protect investors from potential underperformance. Fund families will find it cost-effective to implement such incentive mechanisms only when investors are sophisticated in assessing manager skill. The findings help to explain why a large percentage of fund families outsource their funds to advisory firms.

keywords

  • Outsourcing
    Sub-advisor
    Mutual funds
    Management company
    Incentive contracts
    Fund performance
    Market share
    Agency issue