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Management sub-advising in the mutual fund industry

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  • Moreno, David
  • Rodríguez, Rosa
  • Zambrana, Rafael

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.

Suggested Citation

  • Moreno, David & Rodríguez, Rosa & Zambrana, Rafael, 2018. "Management sub-advising in the mutual fund industry," Journal of Financial Economics, Elsevier, vol. 127(3), pages 567-587.
    • Handle: RePEc:eee:jfinec:v:127:y:2018:i:3:p:567-587
    DOI: 10.1016/j.jfineco.2018.01.004
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    Cited by:

    1. Cici, Gjergji & Kempf, Alexander & Peitzmeier, Claudia, 2022. "Knowledge spillovers in the mutual fund industry through labor mobility," Journal of Banking & Finance, Elsevier, vol. 134(C).
    2. Gajewski, Jean-François & Tran Dieu, Linh, 2021. "Determinants and performance of outsourcing in the european mutual fund market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    3. Jean-François Gajewski & Linh Tran Dieu, 2021. "Determinants And Performance Of Outsourcing In The European Mutual Fund Market," Post-Print hal-03221014, HAL.
    4. Cici, Gjergji & Kempf, Alexander & Peitzmeier, Claudia, 2019. "Knowledge spillovers in the mutual fund industry through labor mobility," CFR Working Papers 18-04, University of Cologne, Centre for Financial Research (CFR), revised 2019.
    5. Beggs, William & DeVault, Luke, 2022. "Mutual fund (sub)advisor connections and crowds," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 231-252.
    6. Zambrana, Rafael & Zapatero, Fernando, 2021. "A tale of two types: Generalists vs. specialists in asset management," Journal of Financial Economics, Elsevier, vol. 142(2), pages 844-861.
    7. Genc, Egemen & Shirley, Sara E. & Stark, Jeffrey R. & Tran, Hai, 2023. "Finding information in obvious places: Work connections and mutual fund investment ideas," Journal of Financial Markets, Elsevier, vol. 63(C).
    8. Fulkerson, Jon A. & Hong, Xin, 2021. "Investment restrictions and fund performance," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 317-336.

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    More about this item

    Keywords

    Outsourcing; Sub-advisor; Mutual funds; Management company; Incentive contracts; Fund performance; Market share; Agency issue;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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