Finding good mutual funds takes a bit of detective work. You often need to do some digging in order to find a fund that has a decent track record and a long-established manager. Manager tenure is one of the most important characteristics of any mutual fund, so it's vital that you understand exactly who's in charge. And for some mutual funds, the answer might be an unpleasant surprise.
Farming out duties
The practice of passing along portfolio management duties to another fund shop has gained a lot of traction in recent years. As a result, many funds that are marketed under one firm's name are actually managed by a completely different company. According to data from Lipper, the number of fund share classes with outside management has risen from 1,900 in 2002 to more than 3,100 in 2007. Likewise, assets in subadvised funds have grown from $261 billion five years ago to $650 billion today. Apparently, more and more fund shops are admitting weaknesses in certain areas of the market and are handing off the management responsibilities to someone else.
There's nothing inherently wrong with subadvised funds. It just means that you, as a fund investor, have a little bit more work cut out for you. Before buying any mutual fund, make sure you know whether the fund is subadvised. (Fund companies should make any subadvisory information readily available.) If the fund is subadvised, check how long that firm has served as subadvisor for the main fund. Also, make sure you know how long the current manager or management team has been with the fund. If either the manager or the subadvisor is new to the fund, you might want to look elsewhere -- because the fund's performance track record will likely have little bearing on its future performance.
A prime example
Subadvisory relationships can work very well, or not so well. Much of their success depends on the fund company's skill in picking quality advisors. Vanguard has been one of the leaders of subadvisory relationships, and has built a solid track record of picking excellent managers.
One such example is Vanguard Wellington
While Vanguard Wellington won't shoot for the stars, the fund has been a consistent and solid performer, landing in the top 25% of its peer group seven of the past eight years. Low expenses and low turnover add to the fund's numerous selling points. Not all subadvised funds will do as well as Vanguard Wellington, but it serves as a great example of how a subadvisory relationship should work.
Do your digging before you buy. You don't want to buy a fund thinking you're getting one firm's investment expertise, only to pay for another's instead. Who's at the helm?
Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. Bank of America is an Income Investor recommendation. The Fool has a disclosure policy.