Most investors who hire an investment or financial professional know that the relationship with that professional is a highly personal one. The investment/financial professional is, more than likely, a party to all client financial information and, often, personal information. The “relationship” with a mutual fund manager is quite different. Many fund companies are large organizations whose managers, while not anonymous, are unlikely to have name recognition for the investing public. There are exceptions, of course. One of these is Peter Lynch, who has achieved legendary “superstar” status as the result of his success with a specific fund.
The managers at many smaller fund companies are more likely to be known to the investors in those funds, since the fund manager is often the head of the firm. Or, to put it another way, the fund family bears the name of the manager. When evaluating a fund, it is helpful to know who is managing it and what their background is, even if you will never meet the person face to face. In fact, it can be helpful to know the manager’s background and career path within the firm as an indication of how well he or she will perform as a fund manager. That is because many of the larger fund families train their fund managers as securities analysts before they are given a fund to manage. These analysts, usually recent business school graduates, generate many of the stock selections and market calls that make or break performance in a fund. Although these fund managers-in-waiting are largely anonymous, their ideas are an important ingredient in the success, or lack of success, of many of the larger funds.
Another little-known fact about fund managers, is that some of them work for a company other than the one whose name is on the fund. They are managing a “subadvised” fund. This is the industry name for subcontracting the management of a mutual fund to another manager. Fund companies usually hire subadvisors when they want to offer a fund with an investment style that is not in the company’s area of expertise. It is often easier and more cost-effective to subcontract the management rather than find and hire an inside manager. As you may surmise, very large funds—with billions of dollars in assets—are more likely to be submanaged, sometimes by several firms.
You might wonder if hiring a subadvisor is beneficial to the investor. It is when the subadvisor is more highly skilled than an in-house manager. The subadvisory relationship is beneficial to shareholders when it provides better management. One plus is it offers a more flexible arrangement that can more easily be terminated if performance lags. Fund companies are more likely to replace a subadvisor than fire one of their own managers. The important measure for the investor is performance, and whether any fund—subadvised or not—is providing returns consistent with the index to which it is compared, as well as the investor’s overall objectives.