Wellington Management of Boston is dominating the rapidly growing business of sub-advising mutual funds, according to a recent study from Financial Research Corp.

Wellington, with about $105 billion in sub-advised assets under management as of Dec. 31, has 34 percent of the market for sub-advised funds, according to Financial Research Corp., a research company in Boston. Wellington's relationship with the Vanguard Group is responsible for much of Wellington's sub-advised assets. Nearly $89 billion in Wellington's sub-advised assets are in Vanguard funds.

Indeed, of the top five fund sub-advisors as measured by assets under management and market share, four are sub-advising for Vanguard. The fifth, Bankers Trust Co. of New York, sub-advises index funds for Fidelity Investments.

Overall, sub-advised assets account for $309 billion, or about six percent, of the mutual fund industry's assets under management, according to the Financial Research report, made public April 15. The percentage of sub-advised assets under management is likely to grow to approximately nine percent by Dec. 31, 2001, according to Financial Research Corp. The number of sub-advised funds should increase from about nine percent of the total funds offered today to nearly 15 percent during the same period, according to Financial Research.

"We're going to see some definite growth," said Raymond Liberatore, a Financial Research analyst.

Mutual fund companies hire sub-advisers to manage funds in investing areas in which the fund management company does not have in-house expertise. The management companies do the marketing and conduct transactions with shareholders. These fund advisers in turn pay sub-advisers a portion of the fee which the advisers receive for overseeing a fund. While contracts between advisers and sub-advisers vary, fund advisers can fire sub-advisers with as little as one-month's notice.

Liberatore said fund companies' desires to offer a full line of fund products are contributing to the growth of the use of sub-advisers. Sub-advisory relationships also provide advisers with an efficient way to manage funds. If performance lags, the advisory firm can fire the sub-adviser and hire a new one, he said. The system tends to be more cost effective for the fund company, Liberatore said.

But, it may not be so cost-effective for shareholders. Financial Research found that, on average, using sub-advisers on a fund was more costly to shareholders. For example, the median total expense ratio for sub-advised domestic equity funds is 0.09 percent higher than non-sub-advised funds. But the added cost is "insignificant" when measured against what Financial Research said was substantially better performance by sub-advised funds on average.

The performance differential arises from the fact that advisers can quickly dismiss a sub-adviser which is not performing at a rate consistent with its peers, Liberatore said. Advisers replace firms which are performing below their peer group average with sub-advisers which have a better track record.

Advisers "are going to the experts in the industry," Liberatore said. "Those experts are delivering."

Bankers Trust of New York is second to Wellington among sub-advisers. It has a market share of 7.3 percent with sub-advised assets under management of nearly $23 billion. Other top firms include: Lincoln Capital Management of Chicago, with 4.5 percent of the market and $13.8 billion in assets under management; Schroder Capital Management of New York which has a four percent market share and $12.1 billion in sub-advisory assets under management; and PrimeCap Management of Pasadena, Calif. with 3.7 percent of the market and $11.4 billion under management.

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