The Relevance of Portfolio Management Core Competencies in Outsourcing Decisions

Abstract

This empirical paper analyzes the role of investment companies’ core competencies in explaining the growing importance of outsourcing within the mutual fund industry. We demonstrate that management companies tend to allocate portfolios that are not within their core competencies (defined as the main asset classes or investment objectives managed) to subadvisors whose core competency coincides with the outsourced mutual fund. We investigate the efficiency of such decisions in terms of performance, and the findings suggest that selecting a subadvisor according to core competency improves mutual fund performance. We also observe evidence that in-house fund management improves when firms outsource their non-core funds.

Keywords: Outsourcing, Subadvisor, Mutual Funds, Efficiency, Management Company, Fund Family, Core Competency, Portfolio Management

JEL Classification: G12