The Geography of Sub-advisors, Managerial Structure, and the Performance of International Equity Mutual Funds

Abstract

We study whether sub-advising abroad provides an information advantage that improves the performance of international equity mutual funds. We find that it does not. In fact, internationally outsourced funds underperform on a risk-adjusted basis by up to 162 bps annually. The underperformance is concentrated in funds managed by single sub-advisors, who are less likely to be terminated after poor performance compared to funds with multiple sub-advisors. We dissect fund performance by the location of its sub-advisors and find that international sub-advisors underperform primarily in their local holdings. Finally, we show that the industry is nonetheless on a path towards equilibrium.

Keywords: Mutual Fund, Performance, Sub-advisor, Local Information, Management Teams, Outsourcing

JEL Classification: G11, G12, G14, G15, G23