Businesses Increasingly Relying on Outside Advisors
Insurance companies, banks and even some traditional fund-management firms are increasingly turning to outside money managers to oversee their customers’ funds in an effort to improve investment performance.
In the U.S., the number of mutual funds managed by outside managers, or “sub-advisors,” has risen 50% to 590 since the end of 1995, according to analysts at Boston-based Financial Research Corp.
It’s a trend that’s starting to catch on in Europe, industry executives said. Lincoln Financial Group U.K. this week hired Goldman Sachs Group Inc. to run 3 billion pounds ($4.9 billion) of U.K. pension and mutual fund-related investments.
“We would like to see more of this in the U.K. where there’s objective selection of managers that’s not based on commissions or fees,” said Leslie Little, a London-based marketing executive for Vanguard Group, the second-biggest mutual fund company in the U.S.
Lincoln Financial Group, whose U.S. parent, Lincoln National Corp., has $137 billion of assets under management, also uses Schroder Investment Management Ltd., Perpetual PLC and Jupiter Asset Management Ltd., among others, to run its funds in the U.K.
The hiring of Goldman “gives our clients more investment choice and access to a broader expertise than is possible with our own operation,” said Greg Reed, investment director of Lincoln Financial Group in Gloucester, England.
More companies will take a similar route since “it’s essential that the best fund managers are employed for companies to differentiate their products,” said Nigel Russell, principal of NJR Research, a fund-management consulting and research firm in Edinburgh, Scotland.
The U.S. experience shows that outside managers often generate higher returns than in-house managed funds, according to Financial Research. The sub-advised funds in the U.S. also tend to charge lower management fees.
The average U.S. stock fund managed by a sub-advisor rose at an annual rate of 16% during the five years ended Dec. 31 while rival in-house managed funds gained 15.7%, Financial Research reported.
The U.S. stock funds with the best five-year records include Vanguard Primecap, managed by a team from Primecap Management Co., and Vanguard Specialized Healthcare, run by Edward Owens of Wellington Management Co.
Among international stock funds, the average sub-advised fund rose an annualized 7.6% in the five-year period ended Dec. 31 and the average in-house fund gained at an annual rate of closer to 5.5%, Financial Research reported.
The best-performing sub-advised international equity funds included Dreyfus Premier Worldwide Growth, run by Fayez Sarofim of Fayez Sarofim & Co.
Government bond funds managed by sub-advisors also outperformed their in-house rivals, gaining at an annual rate of 6.2% in the five-year period ended Dec. 31, exceeding the average 6.1% annual return of in-house managed funds.
Pacific Advisor Government Securities, managed by Kelly Kelly of Spectrum Asset Management Co., and Vanguard Ginne Mae, run by Paul Kaplan of Wellington Management, were among the top-performing government bond funds.
Boston-based Wellington Management is the largest U.S. sub-advisor of funds, managing about $105 billion for other firms, including Vanguard Group and Hartford Life Inc., according to Financial Research.
American Skandia Corp., an insurer in Shelton, Conn., recently used outside managers, including Janus Capital Corp., T. Rowe Price Associates Inc., American Century Investments and J.P. Morgan & Co., to run its funds.
In the U.S., about 9% of all funds are managed by sub-advisors and that’s expected to climb to 12% in the next three years, Financial Research reported.
