Management sub-advising in the mutual fund industry

David Moreno, Rosa Rodríguez, Rafael Zambrana

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)567-587
Number of pages21
JournalJournal of Financial Economics
Volume127
Issue number3
DOIs
Publication statusPublished - 1 Mar 2018

Fingerprint

Industry
Mutual funds
Investors
Agency conflict
Outsourcing
Underperformance
Managers
Co-branding
Incentive mechanism
Market share
Investment style

Keywords

  • Agency issue
  • Fund performance
  • Incentive contracts
  • Management company
  • Market share
  • Mutual funds
  • Outsourcing
  • Sub-advisor

Cite this

Moreno, David ; Rodríguez, Rosa ; Zambrana, Rafael. / Management sub-advising in the mutual fund industry. In: Journal of Financial Economics. 2018 ; Vol. 127, No. 3. pp. 567-587.
@article{e4c299c9a90844f6b2fa590967ce4bcc,
title = "Management sub-advising in the mutual fund industry",
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.",
keywords = "Agency issue, Fund performance, Incentive contracts, Management company, Market share, Mutual funds, Outsourcing, Sub-advisor",
author = "David Moreno and Rosa Rodr{\'i}guez and Rafael Zambrana",
note = "Rafael Zambrana acknowledges financial support from the FCT Funda{\cc}{\~a}o para a Ci{\^e}ncia e a Tecnologia under the project UID/ECO/00124/2013 and POR Lisboa (LISBOA-01-0145-FEDER-007722). Funding Agencies: Ministerio de Economia, Industria y Competitividad (grant nr. ECO2016-77807-P and ECO2015-67035-P ), WRDS-UC3M (grant nr. FEDER UNCC315-EE-3636), CAM (grant nr. S2015/HUM-3353) and Bank of Spain (grant nr. PR71/15-20229)",
year = "2018",
month = "3",
day = "1",
doi = "10.1016/j.jfineco.2018.01.004",
language = "English",
volume = "127",
pages = "567--587",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier Science B.V., Amsterdam.",
number = "3",

}

Management sub-advising in the mutual fund industry. / Moreno, David; Rodríguez, Rosa; Zambrana, Rafael.

In: Journal of Financial Economics, Vol. 127, No. 3, 01.03.2018, p. 567-587.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Management sub-advising in the mutual fund industry

AU - Moreno, David

AU - Rodríguez, Rosa

AU - Zambrana, Rafael

N1 - Rafael Zambrana acknowledges financial support from the FCT Fundação para a Ciência e a Tecnologia under the project UID/ECO/00124/2013 and POR Lisboa (LISBOA-01-0145-FEDER-007722). Funding Agencies: Ministerio de Economia, Industria y Competitividad (grant nr. ECO2016-77807-P and ECO2015-67035-P ), WRDS-UC3M (grant nr. FEDER UNCC315-EE-3636), CAM (grant nr. S2015/HUM-3353) and Bank of Spain (grant nr. PR71/15-20229)

PY - 2018/3/1

Y1 - 2018/3/1

N2 - 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.

AB - 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.

KW - Agency issue

KW - Fund performance

KW - Incentive contracts

KW - Management company

KW - Market share

KW - Mutual funds

KW - Outsourcing

KW - Sub-advisor

UR - http://www.scopus.com/inward/record.url?scp=85041630225&partnerID=8YFLogxK

U2 - 10.1016/j.jfineco.2018.01.004

DO - 10.1016/j.jfineco.2018.01.004

M3 - Article

VL - 127

SP - 567

EP - 587

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 3

ER -