The Scope of International Mutual Fund Outsourcing: Fees, Performance and Risks

This paper examines the causes and consequences of mutual fund outsourcing to different types of service providers: advisors, custodians, administrators, and transfer agents. The data indicate outsourcing is less common among bank-managed funds, funds of leading groups, but more common among funds that are distributed through third parties. Moreover, initial subscription fees are lower among funds that outsource non-advisory services, while annual management fees are not different among funds that outsource. The effect of service outsourcing on subscription fees occurs only for funds targeting institutional investors; retail investors enjoy no fee gains. The outsourcing of advisor services is associated with greater fund risk, but also with higher risk-adjusted performance (Sharpe ratio). However, the positive link with performance disappears when controlling for endogeneity, suggesting that fund managers optimally outsource advisory services in response to expected performance gains. Consistent with our predictions, outsourcing of other services does not impact portfolio decisions. Their impact is through lower subscription fees.