Thursday, March 19, 2015

Outsourcing in the International Mutual Fund Industry: An Equilibrium View

CHUPRININ Oleg, MASSA Massimo, SCHUMACHER David
Access the publisher's website
Journal of Finance (forthcoming)

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.