Publication:
Management sub-advising in the mutual fund industry

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URI: https://hdl.handle.net/10016/33632
ISSN: 0304-405X
DOI: https://doi.org/10.1016/j.jfineco.2018.01.004
UXXI: AR/0000021977
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management_JFE_2018_ps.pdf (984.4 KB)
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2018-03-01
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Elsevier
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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.
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Keywords
Outsourcing, Sub-Advisor, Mutual funds, Management company, Incentive contracts, Fund performance, Market share, Agency issue
Bibliographic citation
Moreno, D., Rodríguez, R., & Zambrana, R. (2018). Management sub-advising in the mutual fund industry. Journal of Financial Economics , 127 (3), pp. 567-587
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