Management sub-advising in the mutual fund industry

David Moreno, Rosa Rodríguez and Rafael Zambrana

Journal of Financial Economics, 2018, vol. 127, issue 3, 567-587

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: Outsourcing; Sub-advisor; Mutual funds; Management company; Incentive contracts; Fund performance; Market share; Agency issue (search for similar items in EconPapers)
JEL-codes: G11 G20 L24 M55 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:127:y:2018:i:3:p:567-587

DOI: 10.1016/j.jfineco.2018.01.004

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