Mutual funds with sub-advisors may not be the best bet for investors, according to The Wall Street Journal.  About 13% of funds hire outside stock-pickers, according to Financial Research Corp.   

The Boston-based research company found that although the funds may perform better than their peers in certain categories, other sub-advised categories, specifically the international sector, do not.  For example, funds invested in the Pacific-Asia region, excluding Japan, that were externally managed, returned, on average, 9.73% less than those in the same sector that had internal mangers for the year ending May 31.

What's more, sub-advised funds typically have fees that are slightly higher than those handled in-house.  In fact, according to Financial Research Corp., U.S. sub-advised funds have expense ratios of about 1.16%, compared to 1.07% for those managed in-house.  The disparity is even greater when it comes to international bond funds, where the fees for those that are sub-advised are 150% that of internally managed funds.

One reason for the performance gap may be that sub-advisors are often chosen based on their records.  A more reliable approach might be judging managers by their "alpha" over time, or the amount above the benchmark.

In certain categories, such as banks and financial services, outside managers typically beat their in-house counterparts by between 4% and 6%.  Natural resources, and communications are other sectors in which sub-advisors have trumped the performance of internal managers.

Despite very mixed results, sub-advised funds have become popular since the 1990s. Assets under management are roughly $755 billion, a 25% increase from 2004, a time where mutual funds overall enjoyed a 15% increase in inflows.

In order to boost performance among international sub-advisors, many companies, such as SEI, Enterprise Fund Distributors, J.P Morgan and Charles Schwab are switching advisors, or dumping large advisors in favor of smaller ones, according to FRC research analyst Chris Sporcic.



The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.