Mutual fund service outsourcing can bring benefits to investors; lower subscription fees and fund performance top the list, according to new research from the SWIFT Institute.
While most research has focused on the US funds market and middle/back office services, the SWIFT Institute report, entitled: "The Scope of International Mutual Fund Outsourcing: Fees, Performance and Risk", examines the full scope of services that are outsourced by administrators, transfer agents, custodians, advisors, trustees, and auditors across the Continent. The research was produced for the SWIFT Institute by Douglas Cumming of York University, Armin Schwienbacher of Université de Lille and Feng Zhan of John Carroll University.
Based on over 13,000 mutual funds domiciled in Europe, this study shows outsourcing is very common; 12 per cent of funds use external advisors, 41 per cent use external administrators, 45 per cent use external transfer agents, and 58 per cent use external custodians, and all funds outsource to external trustees and auditors. In addition, this paper shows that outsourcing is less common among funds managed through banks, UCITS funds and institutional funds. Interestingly, the research finds that funds with outsourcing are more likely to have 11 per cent – 14 per cent lower subscription fees relative to the overall average fees in the data.
Furthermore, this study finds mixed evidence on the performance implications associated with outsourcing. Outsourcing advisory services are associated with higher risk-adjusted performance (Sharpe ratios), while outsourcing of administrator, transfer agent, and custodian services are unrelated to risk. The association between outsourcing of advisory services and performance is more pronounced for funds belonging to a bank-managed group.
Peter Ware, Director of the SWIFT Institute, says: "This latest research from the SWIFT Institute gives a comprehensive analysis of outsourcing by mutual funds and some of the issues, challenges and benefits. Most academic research to date has been focused on the US mutual fund space and on middle / back office outsourcing. This is one of the first studies that looks at Europe, and takes into account outsourcing of front office activities, such as advisory services."