Outsourcing in the International Mutual Fund Industry: An Equilibrium View
85 Pages Posted: 13 Oct 2011 Last revised: 8 Oct 2014
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Outsourcing in the International Mutual Fund Industry: An Equilibrium View
Happy Losers: Subcontracting in International Asset Management
Date Written: September 1, 2014
Abstract
We study outsourcing relationships among international asset management firms. We find that in companies that manage both outsourced and inhouse funds, inhouse funds outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute this result to preferential treatment of inhouse funds via the preferential allocation of IPOs, trading opportunities and cross-trades, especially at times when inhouse funds face steep outflows and require liquidity. We explain preferential treatment with agency problems: it increases with the subcontractor’s market power and the difficulty of monitoring the subcontractor and decreases with the subcontractor’s amount of parallel inhouse activity.
Keywords: Mutual Funds, Performance, Outsourcing, International Markets
JEL Classification: G15, G23, G30, G32
Suggested Citation: Suggested Citation
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