What it means
Instead of employing one team to manage everything, the sponsor splits a fund or mandate into portions and gives each to a specialist. One subadviser might run large company shares, another small companies and a third international bonds.
The lead adviser decides the overall mix, chooses the subadvisers and sets the guidelines they must follow. The attraction is access to specialist skill without having to build every capability in-house.
A pension plan or fund group can combine managers with different styles, so that one manager's weakness is less likely to coincide with another's. The structure also makes it practical to replace a poor performer without rebuilding the whole fund.
In some countries, regulators allow certain funds to hire and replace subadvisers without a shareholder vote, provided they comply with disclosure conditions. That makes the manager-of-managers model faster to adjust than a fund where each change needs investor approval.
The rules differ by jurisdiction, so a reader should check the local framework and the fund's documents. Costs need careful watching.
The investor pays the subadvisers' fees and usually an additional fee to the lead adviser for selection, oversight and reporting. This layering can be worthwhile if the oversight adds value, but it can also push total costs above those of a simple index fund.
A good lead adviser has a clear process for hiring and firing, monitors performance against agreed benchmarks, and watches for overlaps in holdings that could leave the investor with hidden concentration. Transparency about those processes is a key test when choosing a manager-of-managers provider.
The model is also known as a multi-manager approach. It sits between running everything in-house and simply buying a collection of third-party funds, because the lead adviser keeps control of the mandate, the risk limits and the contracts with each subadviser.
In practice
Real-world examples.
Example
A fund group launches a global equity fund and hires three specialist firms, one each for the Americas, Europe and Asia. The group's investment team decides how much each firm receives and reviews their results each quarter. If one region becomes too large after a rally, the team rebalances back to the target weights.
Example
A corporate pension plan with $400,000,000 of assets uses a manager of managers to oversee its bond, share and property mandates. When the property manager underperforms for three years, the lead adviser replaces it with a new specialist. The transition is planned so that the pension plan avoids paying more trading costs than necessary.
Example
A university endowment hires an outsourced chief investment office, which selects and monitors a dozen external managers. The university's board only has to deal with one reporting relationship rather than twelve. The board also receives one consolidated report on performance, risk and fees.
Formula
Calculation
Blended fee = Sum of (Each subadviser's share of assets x Its fee rate) + Oversight fee
A $300,000,000 fund is split equally among three subadvisers. Their fees are 0.40%, 0.50% and 0.60%, and the lead adviser charges an additional 0.10% for oversight. The average subadviser fee is (0.40% + 0.50% + 0.60%) / 3 = 0.50%. Adding the oversight fee gives 0.50% + 0.10% = 0.60%, which is $300,000,000 x 0.006 = $1,800,000 a year.Case study
Seen in the real world.
Cedar Ridge Investments is an illustrative, fictional fund sponsor with a $600,000,000 multi-asset fund. Its in-house team was strong in bonds but weak in emerging market shares, so it hired an outside specialist to run that part of the portfolio.
After two years, the specialist lagged its benchmark by 3% a year. The sponsor reviewed the manager against its written criteria, which included performance, risk and staff turnover, and replaced the firm with a better fit.
In this illustrative story, the change was made without disruption to the rest of the fund, and the sponsor reported openly on its reasons. The experience showed that the real value of the structure lies in the discipline of the oversight, not just in the hiring.
Watch out
Common mistakes.
- Assuming the lead adviser picks every investment, when day-to-day decisions are made by the subadvisers.
- Ignoring the extra layer of fees, which can reduce the net benefit to the investor.
- Overlooking overlaps in holdings, where two subadvisers buy the same shares and create hidden concentration.
Questions
People also ask.
Why use a manager of managers instead of one manager?
It gives access to specialist skill in different areas and makes replacing a weak manager easier.
Does the investor pay more?
Often yes, because there are subadviser fees plus an oversight fee, so the extra value should justify the cost.
Who is responsible if a subadviser performs badly?
The lead adviser remains accountable for choosing and monitoring the subadviser, and it can replace the firm.
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