Outsourcing in the International Mutual Fund Industry: An Equilibrium View

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

Journal: The Journal of Finance, forthcoming

Abstract:

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.