Sub-Advised Fund 

Sub-advised funds have become increasingly popular investment products lately, with a unique experience of expertise and diversification plus efficiency for institutional and individual investors. Due to their multi-manager approach, sub-advised funds exploit this knowledge in sub-advisors; such a scenario enables the accessing of markets and strategies for which an investor cannot qualify by investing in a particular fund. In this article, we will discuss sub-advised funds and their structure, kinds, benefits, and drawbacks, along with examples and key questions involving the operation and value of a sub-advised fund. 

What is a Sub-Advised Fund? 

A sub-advised fund is an investment fund in which the primary investment advisor delegates certain investment management responsibilities to one or more external managers, called sub-advisors. The primary advisor maintains ultimate responsibility for the fund but contracts a sub-advisor to make day-to-day investment decisions within the parameters set for the fund. In contrast, they set their objectives, comply with all relevant regulations, and market the fund. 

Under this structure, the main advisor focuses on the fund’s overall strategy while using the sub-advisor’s specialised expertise in a specific asset class, region, or investment style. Sub-advised funds are widespread in mutual funds, exchange-traded funds (ETFs), and variable annuities. 

Key features of Sub-Advised Funds 

• Delegation of Specialised Expertise: The main advisor delegates specific portfolio parts to sub-advisors who specialise in that area. 

• Formal Agreement: A sub-advisory agreement defines the sub-advisor’s responsibilities, investment policies, and fees. 

• Dual Management Structure: The fundamental advisor and sub-advisors collaborate to manage the fund and achieve its objectives. 

Understanding Sub-Advised Funds 

Sub-advised funds are based on a “manager-of-managers” concept. In this model, the primary advisor identifies and oversees sub-advisors who should align with the fund’s overall strategy and performance objectives. 

An example of a mutual fund employing a global equity strategy is one in which the main advisor assigns sub-advisors based on their areas of strength who independently oversee their share of the investment while adhering to the directives and policy mandates of the head/sub-main advisor.  

What Do Sub-Advised Funds Do? 

1. Purposes of Funds: The primary advisor establishes goals, such as growth, income, or a balanced approach, and guides the fund’s investment.
2. Sub-Advisor Selection: Sub-advisors should be judged on some professional track record and aligned with the fund’s objectives and expertise.
3. Portfolio Management: Sub-advisors make security selections, conduct research, and execute trades within their assigned mandates.
4. Performance Monitoring: The primary advisor is constantly monitoring the performance of the sub-advisors and may remove them if they are not meeting the expected results.

Who Invests in Sub-Advised Funds? 

• Institutional Investors: Pension funds and insurance companies invest in sub-advised structures to diversify management skills. 

• Individual Investors: Retail investors gain access to sub-advised funds mainly through mutual funds and ETFs. 

Types of Sub-Advised Funds 

Sub-advised funds can assume many different forms depending on their structure and investment strategy: 

1. Mutual Funds

The most common type of sub-advised fund is a mutual fund. In this arrangement, investors pool their money, which the primary advisor and sub-advisors manage. For example, a diversified equity mutual fund might employ sub-advisors for specific sectors like technology, healthcare, or energy. 

2. Exchange-traded funds (ETFs)

ETFs also use sub-advisors for specialised strategies like thematic investing or sector-specific portfolios. Sub-advised ETFs benefit investors from niche expertise while taking advantage of ETFs’ liquidity and transparency. 

3. Variable Annuities

Variable annuities are insurance products that offer investment options managed by sub-advisors. They frequently include sub-advised portfolios to give policyholders various investment choices across asset classes. 

4. Hybrid Funds

Some funds combine several sub-advisors into a hybrid. For example, a balanced fund could use one sub-advisor for equities and another for fixed income. 

5. Institutional Funds

Large institutional funds, such as pension plans, can utilise sub-advised structures to diversify across different management styles and avoid over-reliance on a single firm. 

Benefits and Drawbacks of Sub-Advised Funds 

Sub-advised funds have many advantages, but they also have some disadvantages. Knowing them would make someone a wiser investor. 

Benefits  

1. Access to Specialised Knowledge:

Sub-advisors have specialised knowledge and expertise in niche areas or otherwise complex markets. This access helps the fund outperform its peers, especially in the specialised segment. 

2. Enhanced Diversification:

These different sub-advisors, when used, spread your investment across various strategies and sectors of asset classes of investment so that your risk is diminished. 

3. More capable capability:

Sub-advised funds feature high performance due to huge know-how and abilities of highly professional managers. 

4. Operational Efficiency:

For main advisors, sub-advisors can free them from in-house expertise for every strategy, allowing them to launch funds faster and utilise resources efficiently. 

5. Flexibility:

Primary advisors can respond to changing market conditions by replacing weak sub-advisors or adding new ones to better the fund’s performance. 

Drawbacks 

1. Higher Charges:

The dual management structure is more expensive because investors pay fees both to the primary advisor and sub-advisors. This usually leads to higher expense ratios than single-manager funds. 

2. Complexity:

The multi-manager model makes it a bit difficult for investors to appreciate the fund’s fee structure, how the fund is managed, and how its performance would be evaluated. 

3. Possible Misalignment:

This could be another rationale for the fund’s strategy’s inconsistency because the underlying advisor may have different investment philosophies from the sub-advisors. 

4. Less Control

The primary advisor’s management of day-to-day decisions is managed with slight oversight, so there can sometimes be deviations from their objectives for the fund. 

Examples of Sub-Advised Funds 

To illustrate the concept of sub-advised funds, let us explore examples from the U.S. and Singapore markets: 

Example 1: Hartford International Equity Fund (U.S.) 

Hartford Funds manages this mutual fund. Wellington Management acts as the fund’s sub-advisor. Wellington brings considerable experience in international equities, allowing the fund to achieve its objective of long-term capital appreciation. 

• Structure: Hartford Funds will provide the overall strategy and marketing while Wellington selects securities and manages the portfolio within defined parameters. 

• Key Benefit: The most important advantage is that investors can enjoy Wellington’s expertise in international markets without necessarily investing directly in their proprietary funds. 

Example 2: State Street Global Advisors Sub-Advised Funds (U.S.) 

State Street Global Advisors relies on sub-advisors for certain asset classes, such as small-cap equities or emerging markets. For instance, SSGA might partner with a boutique firm specialising in small-cap stocks to manage a sector-focused mutual fund. 

• Structure: SSGA administers the fund and maintains oversight, and the sub-advisor manages the investment decision within its specialisation. 

• Key Benefit: This method gives investors access to specialised management while having the capabilities and oversight of a global organisation. 

Example 3: Nikko AM StraitsTrading Asia Ex-Japan REIT ETF (Singapore) 

Nikko Asset Management utilises sub-advisors to manage portions of its real estate investment trust (REIT) ETFs. 

• Structure: The fund benefits from the expertise of local managers who understand the nuances of Asian REIT markets. 

• Key Benefit: Investors get exposure to Asia’s real estate markets through a sub-advised structure that combines regional insights with global investment standards. 

Frequently Asked Questions