Outsourcing in the International Mutual Fund Industry: An Equilibrium View

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Authors: Chuprinin, O., Massa, M., and Schumacher, D.

Publications: Journal of Finance, Vol. 70, No. 5, 2015

Abstract
We study outsourcing relationships among international asset management firms. We find that, in companies that manage both outsourced and in-house funds, in-house funds outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute this result to preferential treatment of in-house funds via the preferential allocation of IPOs, trading opportunities, and cross-trades, especially at times when in-house 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 in-house activity. © 2015 the American Finance Association.

Read full article: Journal of Finance, September 3, 2015