The Scope of International Mutual Fund Outsourcing: Fees, Performance and Risks

42 Pages Posted: 18 May 2015

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Armin Schwienbacher

SKEMA Business School

Feng Zhan

John Carroll University - Boler School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 16, 2015

Abstract

This paper examines the causes and consequences of mutual fund outsourcing to different types of service providers: advisors, custodians, administrators, and transfer agents. The data indicate outsourcing is less common among bank-managed funds, funds of leading groups, but more common among funds that are distributed through third parties. Moreover, initial subscription fees are lower among funds that outsource non-advisory services, while annual management fees are not different among funds that outsource. The effect of service outsourcing on subscription fees occurs only for funds targeting institutional investors; retail investors enjoy no fee gains. The outsourcing of advisor services is associated with greater fund risk, but also with higher risk-adjusted performance (Sharpe ratio). However, the positive link with performance disappears when controlling for endogeneity, suggesting that fund managers optimally outsource advisory services in response to expected performance gains. Consistent with our predictions, outsourcing of other services does not impact portfolio decisions. Their impact is through lower subscription fees.

Keywords: Mutual Funds, Outsourcing, Advisors, Administrators, Transfer Agents, Custodians

JEL Classification: G23, G30

Suggested Citation

Cumming, Douglas J. and Schwienbacher, Armin and Zhan, Feng, The Scope of International Mutual Fund Outsourcing: Fees, Performance and Risks (May 16, 2015). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2607139

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Armin Schwienbacher (Contact Author)

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

HOME PAGE: http://sites.google.com/view/armin-schwienbacher

Feng Zhan

John Carroll University - Boler School of Business ( email )

University Heights, OH 44118-4581
United States

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