What it means
Most funds have one firm that sets the strategy and also manages the money. In a subadvised fund, the sponsoring firm splits those jobs: it keeps the relationship with investors and the legal duty to supervise, and it appoints a specialist to run all or part of the portfolio.
This is common when a fund company wants to offer a product in an area where it has no in-house expertise. A bank-owned fund group might hire a small-company specialist, a foreign-equity specialist or a bond manager for a niche market.
Some funds use several subadvisers at once, each running a slice of the assets. The subadviser is paid out of the fee the fund pays its main adviser, so the investor sees one expense ratio (the yearly cost of owning the fund as a percentage of assets).
The main adviser keeps the difference between the total fee and the subadviser's share as payment for oversight, distribution and administration. That arrangement is why fee levels and the size of the retained portion are worth reading in the fund documents.
Oversight is the main selling point. The main adviser monitors performance, risk limits and compliance, and it can replace a subadviser that underperforms without the fund having to close or change its name.
In some places, regulation requires board approval of a subadviser, so a change is not a casual decision. Costs deserve a careful look because the structure adds a layer of people to pay.
A subadvised fund is not automatically dearer than a single-manager fund, but the investor should compare the total expense ratio with similar funds and ask what the main adviser contributes for the share of the fee it keeps. Competition has pushed many sponsors to share more of the fee with the subadviser.
For a business buying or recommending funds, such as a company choosing options for an employee retirement plan, it helps to know who actually makes the investment decisions. The name on the fund may be the sponsor while the subadviser's team does the work.
Look at the subadviser's record and tenure, not just the sponsor's brand.
In practice
Real-world examples.
Example
An insurance company launches a retirement fund range for its customers and hires a specialist boutique to manage the emerging-market equity fund. The insurer keeps the brand and the client relationship while the boutique makes the share-picking decisions.
Example
A human resources manager reviews the funds offered in the company pension plan and finds that two of them share the same subadviser. She concludes the plan holds more overlap than the fund names suggest and asks the plan provider to explain it.
Example
A fund sponsor replaces an underperforming subadviser after three years of lagging its benchmark. Investors keep the same fund, ticker and fee, but the portfolio is gradually reshaped by the new manager. The sponsor sells holdings in stages to avoid unnecessary trading costs and tax charges.
Formula
Calculation
The money split between the main adviser and the subadviser follows from the fee structure:
Retained fee = Total advisory fee - Subadvisory fee
Take a fund with $400,000,000 of assets and a total advisory fee of 0.60% a year. The total fee is $400,000,000 x 0.006 = $2,400,000. If the subadviser is paid 0.25%, it receives $400,000,000 x 0.0025 = $1,000,000, so the main adviser retains $2,400,000 - $1,000,000 = $1,400,000, which equals 0.35% of assets.Case study
Seen in the real world.
Harbourline Funds is an illustrative, fictional fund group with strong skills in government bonds but none in small-company shares. It wanted a small-company fund in its range and chose to hire an outside specialist, Redstone Capital, rather than build a team from scratch.
The sponsor set the fund's objectives and risk limits, reviewed the portfolio every quarter, while Redstone ran the portfolio for 0.30% of assets out of a total fee of 0.75%. Harbourline kept the other 0.45% for supervision, marketing and administration.
After four years in this illustrative story, performance trailed the benchmark by a wide margin and Harbourline's board replaced Redstone. The change took three months, investors did not need to do anything, and the fund continued under the same name with a new manager.
Watch out
Common mistakes.
- Assuming the sponsor's own staff pick the investments in every fund carrying the sponsor's name.
- Treating a subadviser change as a new fund, when in most cases the fund, its fees and its holding structure carry on.
- Ignoring the retained fee, which can be a large share of the total cost to the investor.
Questions
People also ask.
Does the investor pay the subadviser directly?
No, the subadviser is normally paid by the main adviser out of the fee the fund already charges.
Who is responsible if a subadviser breaks the rules?
The main adviser and the fund's board remain responsible for oversight, which is why they must monitor the subadviser.
Is a subadvised fund better than a fund run in-house?
Not automatically, because results depend on the manager's skill and costs rather than on the structure.
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