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Management Sub-Advising in the Mutual Fund Industry

61 Pages Posted: 31 Aug 2012 Last revised: 23 Feb 2017

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration

Rosa Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

Rafael Zambrana

Nova School of Business and Economics

Date Written: February 22, 2017

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.

JEL Classification: G11, G23, M55

Suggested Citation

Moreno, David and Rodríguez, Rosa and Zambrana, Rafael, Management Sub-Advising in the Mutual Fund Industry (February 22, 2017). Available at SSRN: https://ssrn.com/abstract=2138998 or http://dx.doi.org/10.2139/ssrn.2138998

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Rosa Rodriguez

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

HOME PAGE: http://www.business.uc3m.es/en/faculty/profesor/perfil/42

Rafael Zambrana (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, Lisbon 1099-032
Portugal

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