Outsourcing Management: Does It Improve the Performance of Mutual Funds?

From 1980 to 2014, the percentage of American households that owned mutual funds rose from 5.7 percent to 43.4 percent. At the beginning of 1980, mutual funds held only around 4 percent of all U.S. equity. However, that figure is now around 30 percent. That increased share is basically explained by the fact that direct individual ownership of stocks dropped over this period from roughly 50 percent to about 20 percent. And while index and other passively managed funds are gaining ground, actively managed funds control the lion’s share of the mutual fund market.

What many investors don’t know is that a significant number of mutual fund companies outsource the management of their funds to subadvisory firms. In a typical outsourcing arrangement, the fund family retains marketing and distribution fees while the external advisor obtains the management fees. The question for investors is: does outsourcing improve performance?

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