Does hiring sub-advisors abroad improve international mutual fund performance?

Last Thursday night, a paper seeking to answer this question was awarded the CFA Society Toronto and Hillsdale Canadian Investment Research Award.

The purpose of the award is to advance investment management through practitioner-relevant research in Canadian capital markets. “Our objective was always to try to increase the rate of publication and to reward excellence in research,” said Chris Guthrie, president and chief executive officer of Hillsdale Investment Management Inc., speaking at the event. The hope is, over the years, the research will move the investment profession forward in a good way, he noted. “That’s why we do this.”

The paper’s authors are Michael Densmore and Pauline Shum Nolan from York University and Markus Broman from Syracuse University. Shum Nolan is taking home the prize for the second time.

This year’s paper was inspired by her work on the York University pension plan’s investment committee, which she’s been a part of for 14 years, she said.  Shum Nolan was approached by a firm highlighting how a global network of researchers and portfolio managers is an advantage when it comes managing global pooled funds, while other firms have said they don’t need to be abroad to perform well. She decided to test this out. “I thought well, as a researcher, let the data speak,” she said.

The paper looked at how a foreign presence in research and asset management affects the performance of international equity funds sold in the U.S.

“The main research question we were looking to answer was basically, how does sub-advisor location and affiliation impact fund performance,” said Densmore, noting the paper focuses on location, as well as whether the sub-advisories are in-house or outsourced.

It found sub-advisors located aboard don’t improve performance, suggesting either that these managers aren’t able to exploit local information or that U.S.-based managers don’t have a disadvantage based on their location, the paper said.

As well, the research discovered funds with outsourced, instead of in-house, international sub-advisors underperformed on a risk-adjusted basis by up to 122 bps annually, compared to funds that aren’t sub-advised. The paper partially credited this to international outsourced sub-advisors being less active in managing assets.

This year’s winners received $10,000 for their paper.