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Four Darn Good Subadvised Funds

Subadvisors and fund companies can make beautiful music together.

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I'm not sure why, but some investors have a tough time warming up to subadvised funds. These are funds where the fund company hires an outside asset manager to run the portfolio while the fund company handles the investors' accounts, SEC filings, and the rest of the back-office work.

Some investors have written me concerned that the subadvisor may not be as committed to the fund as they would be to their own. That may occasionally be the case, but there are plenty of instances where it isn't, and you're missing out if you pass on such funds. Some subadvisors have been running certain funds for so long that their commitment is obvious. And a number of the better subadvised funds can claim high levels of manager investment in the funds.

Subadvising isn't a magic formula for success, but there are good reasons behind it. Running the administrative side of mutual funds isn't closely related to the skills needed to manage portfolios, and some subadvisors and fund companies have gone so far as to swear off the other side of the business so that they can focus on what they are good at. In addition, fund companies that hire subadvisors can offer scale that brings in a lot of money, driving up revenues for the subadvisor while driving down fees for the investor. Subadvisors don't mind that those lower fees also make for a better track record, either.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.