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
- A mutual fund subadvisor is a third party fund manager hired by a company to manage a specific investment portfolio.
- Typically, a mutual fund company would bring in an outside manager because of that manager's expertise in managing a certain area of the market or specific strategy.
- On the upside, sub-advised funds are often managed by experts in a certain strategy, allowing a fund to bring a new strategy to market quickly and competitively.
- On the downside for investors, sub-advised funds tend to bring higher fees due to the need to pay both the subadvisor and the overall management company.
How a Mutual Fund Subadvisor Works
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 sub-advisory 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, sub-advisory 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 sub-advisory 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 sub-advisory 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.
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.
Although there are positives and negatives, overall subadvisors can greatly help a fund company to attract new clients and broaden their options for investors.
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.