Management Sub-Advising in the Mutual Fund Industry
61 Pages
Posted: 31 Aug 2012
Last revised: 23 Feb 2017
Universidad Carlos III de Madrid - Department of Business Administration
Universidad Carlos III de Madrid - Department of Business Administration
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:
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
