In the typical adoption, a large mutual fund company takes over the management of one or more funds from a smaller firm, retaining the fund’s investment managers as subadvisors. There is usually a cash payment to the smaller firm based on the size of the fund, its track record, and the length of the track record. These “adoptions” are considered a prudent way for a fund family to expand its lineup.
The average fund being adopted has $500 million to $2 billion in assets; some adopted funds have just $25 million. For the small funds, their managers may have more of a passion for the management of money and not for the management of the business. Adopted funds tend to have high ratings when it comes to returns. Fund adoptions usually require shareholder approval. Advisors should look for fee changes and possible changes in the fund’s investment objective.