Outsourcing in the International Mutual Fund Industry: An Equilibrium View

Published: 23 January 2015

Authors: Oleg Chuprinin (University of New South Wales), Massimo Massa (INSEAD), David Schumacher (McGill)

Journal: The Journal of Finance, forthcoming


We study outsourcing relationships among international asset management firms. We

find that in companies that manage both outsourced and inhouse funds, inhouse funds

outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute

this result to preferential treatment of inhouse funds via the preferential allocation of

IPOs, trading opportunities and cross-trades, especially at times when inhouse funds face

steep outflows and require liquidity. We explain preferential treatment with agency

problems: it increases with the subcontractor’s market power and the difficulty of

monitoring the subcontractor and decreases with the subcontractor’s amount of parallel

inhouse activity.

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