What is a Mutual Fund Subadvisor
A mutual fund subadvisor is a third-party money manager that is hired by a mutual fund company to manage an investment portfolio. Subadvisors are typically sought out by management investment companies because of their expertise in managing a specific strategy.
An Introduction To Mutual Funds
BREAKING DOWN Mutual Fund Subadvisor
Mutual fund subadvisors are associated with the management of sub-advised funds. Management investment companies partner with mutual fund subadvisors to offer mutual funds targeting specific objectives. A management investment company may seek to work with a subadvisor to improve the performance of a particular strategy or to offer a new strategy. Oftentimes, investment companies will seek a subadvisor to offer a new strategy because of the efficiencies involved with contracting a manager versus building from within.
Agreements and Efficiencies
Since subadvisory relationships are third-party partnerships involving the management company and a subadvisor, they require extensive legal documentation. Subadvisory agreements include details on the duties of the subadvisor, fund expense management, subadvisory fees, the duration of the agreement and any collaboration involved between the parties for marketing and distributing the fund.
Third-party subadvisors have expertise in a particular investment strategy. They are utilized to offer funds to investors managed to a specific investment objective. While legal agreements and terms can be extensive, many investment companies will find that they can offer a certain strategy with lower costs and better operational processing through the development of a subadvisory relationship.
Advantages and Limitations
Sub-advised funds are often managed by the best managers in a particular strategy. These managers have expertise in all aspects of the fund’s management, including investment decisions, trading strategies and operational efficiencies.
A subadvisory relationship can allow a fund company to bring a new strategy to the market relatively quickly. An investment company may work with a single subadvisor to develop a new customized product, or multiple subadvisors for various products. They may also choose to partner with a single subadvisor to build out a diversified group of new products. Overall, subadvisors can greatly help a fund company to attract new clients and broaden their options for investors.
One factor potentially limiting investor interest in sub-advised funds are the fees. Fees on sub-advised funds are generally higher because they require compensation to both the subadvisor and the management company. Investors should closely consider the fees of sub-advised funds relative to other fund options. High fees can detract from a fund’s total return and take value from a shareholder's investment.
Leading Subadvisors and Funds
In 2018 there were over 300 sub-advised managers in the market with over $4 trillion in sub-advised assets managed comprehensively. A report from Pensions & Investments presents Wellington Management as the industry’s leading subadvisor by assets with over $400 billion in sub-advised assets under management. As of 2018, Wellington is the primary subadvisor for the Hartford mutual funds, which represents a significant portion of its sub-advised assets under management.