Articles for Financial Advisors

When A Fund Uses Outide Managers

When A Fund Uses Outide Managers

About a dozen mutual fund families rely extensively on outside managers. In most cases, the fund firm is the portfolio manager or “investment advisor,” and it then hires the outside manager as “subadvisor.” Each party receives part of the management fee the fund charges its investors.

Looking at five-year returns in 85 fund categories, Morningstar found that subadvised funds did better in 43 categories and underperformed in-house managers in 42 categories. Morningstar believes that in many cases, the additional fee paid for outside management is a difficult hurdle to overcome.
One of the biggest users of outside managers is Vanguard, who uses 29 different subadvisors for its actively managed equity and balanced funds. Vanguard does not use any subadvisor for any of its index funds. However, unlike other fund companies, Vanguard does not participate in the management fee of its funds that use outside managers. Some of the subadvisors Vanguard uses are: [1] Barrow, Hanley, Mewhinney & Strauss, [2] Lazard Asset Management, [3] Armstrong Shaw Associates, [4] Hotchkis & Wiley Capital Management, [5] Sanders Capital, and [6] Wellington Management.

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