BOSTON -- Domestic and international equity mutual funds managed by subadvisers outperform internally managed ones, Financial Research Corp. reports.
Government bond and money market funds under external management also did better than those under internal management, according to the study.
The biggest beneficiaries might be the subadvising money managers themselves: Since 1995, assets managed by subadvisers grew 32%, compared with 23% for internally managed assets. Net sales to subadvised funds topped $30 billion in 1997 and 1998, or 6.5% of total industry net sales. Subadvised mutual funds held $309 billion in assets by the end of 1998, a 27% increase from the previous year.
FRC also found almost one of every 11 U.S. mutual funds is now managed by a subadviser and one in nine domestic equity funds and one in six international/global funds is subadvised.
As for performance, domestic equity funds managed externally outperformed internally managed funds by margins ranging between 30 and 50 basis points over the one-, three- and five-year periods ended Dec. 31. They trailed internally managed funds by only 13 basis points over 10 years, marginal "given the magnitude of returns within this asset class," said FRC's analysts in their report.
Subadvised international and global funds garnered an excess return (over internally managed ones) of 3.57% for the year ended Dec. 31 and 2.16% over five years.
Government bond funds managed by subadvisers added 71 basis points per year in additional return over the three years. Corporate bond funds managed by subadvisers underperformed for the year ended Dec. 31, but showed strong outperformance over three, five and 10 years.
Subadvised money market funds also delivered a minimum of 40 basis points of outperformance per year for the one-, three-, five-and 10-year periods.
By contrast, subadvised balanced and Standard & Poor's 500 index funds significantly underperformed similar funds managed by in-house staff.
Wellington wins
The biggest winner in the subadviser stakes remains Wellington Management Co., Boston, which managed $105 billion for mutual fund companies at the end of December. It manages more than 50 subadvisory portfolios; subadvisory assets under management grew 47% in 1997 and 1998. A substantial portion of Wellington's subadvised assets are from the Vanguard Group and North American Funds.
A newer beneficiary of the subadvising trend is Bankers Trust Co., New York, which had asset growth in subadvised portfolios of more than 200% between December 1996 and December 1998 to $22.5 billion. Bankers Trust picked up the management of Fidelity Investments' indexed mutual funds in mid-1997.
Smaller managers, institutional managers and niche players, particularly international fund managers, also have found subadvisory work a profitable way into mutual fund management.
Data from FRC showed, for example, that Equinox Capital Management, New York, increased subadvised assets by 101% in the past two years to $7.9 billion; Jennison Associates Capital Corp., New York, had subadvisory growth of 144%; Franklin Portfolio Associates LLC, Boston, 222%; and Fayez Sarofim & Co., Houston, 421% to $5.3 billion.
Schroder Capital Management International Inc., New York, managed more than $12 billion for other fund companies at the end of 1998, mainly in international portfolios. On an individual basis, FRC singled out the Dreyfus Premier WorldWide Growth Fund and the Northstar Investment Management International Value Funds as having particularly strong sales in 1998 among international/global funds.
Different sources
Sources of subadvisory contracts include:
* Companies filling in gaps in asset class management, especially for international management.
* "Virtual fund groups," which have a full lineup of mutual funds without internal investment management skill. They include Litman Gregory Fund Advisors, Citizens Trust, The Managers Funds LP, Harbor Capital Advisors Inc., IDEX Management Inc., American Skandia Trust, Griffin Funds and Undiscovered Managers LLC. Of these, Harbor Capital is the largest, with more than $12 billion.
* Firms that use subadvisers for most, but not all, of their business. These include Massachusetts Mutual Life Insurance Co., SEI Investments, Hartford Investment Management Co. and AMR Investment Services Inc.
The largest user of subadvisers remains the Vanguard Group of Investment Cos., Malvern, Pa., which passed on almost $93 billion, or 21% of total assets, to subadvisers such as Wellington; Lincoln Capital Management Co., Chicago; and PRIMECAP Management Co., Pasadena, Calif.
Fidelity Investments, Boston, is the next-largest user of subadvisers, thanks to the more than $22 billion (4% of total assets) it passes to Bankers Trust for passive management."
