Understanding subadvised mutual funds

More than one-third of mutual funds and ETFs sold in Canada are subadvised, according to Morningstar data, meaning that the asset manager that distributes them has outsourced the management of the fund’s portfolio. The team in charge of the investment management is known as the subadviser, and the fund is deemed subadvised. This is done for both strategic and practical reasons:

1) From the practical standpoint, it’s possible that the distributing firm does not have the internal capabilities to manage the fund’s mandate. Most distributors of mutual funds conduct market intelligence exercises to determine what kind of strategies investors are interested in at any given time. In some cases, they might identify a strategy that would be of interest to investors but may not have in-house investment expertise in that area. In this case, the distributing firm would conduct various due diligences, like the kind done by Morningstar’s Manager Research group, to find an external team, or subadviser, that would be best suited to manage the fund.

CI Global Asset Management, for example, identified an investor need in private equity and sought out three different subadvisers to manage funds offering exposure to private real estate (CBRE Investment Management), private markets (Adams Street) and private infrastructure (HarbourVest). Although these funds are only available to accredited investors, it demonstrates how a niche subadviser can enhance a firm’s fund offerings.

2) From the strategic standpoint, a distributing firm’s product platform might be purposefully based on subadvisory relationships, allowing the distributor to focus heavily on client service and asset gathering. Many firms in Canada rely on this model – National Bank Investments, Investors Group and Desjardins, to name a few. In these cases, the in-house investment expertise revolves around selecting subadvisers for stand-alone funds or to combine subadvised funds into a multi-asset class portfolio, known as a fund-of-funds or a multimanager fund.

3) The distributing firm may also have an ownership stake in the subadviser’s firm or may have a strategic partnership with the subadviser’s firm and therefore want to provide it with broader distribution. For example, Sun Life Global Investments distributes funds managed by MFS Investments, a firm owned by Sun Life, while TD Asset Management distributes funds managed by T. Rowe Price, a firm it has partnered with.

Subadvised funds in Canada provide Canadians access to investment management teams they may not otherwise have access to. Many firms with a predominantly institutional clientele require these types of relationships to distribute products to retail clients. Similarly, many global best-in-class portfolio managers require these types of partnerships to distribute funds in Canada. When considering investing in a subadvised fund, investors should extend their due diligence to not only the distributing firm, but to the subadviser as well.

Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.

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