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The Geography of Sub-advisors and its Impact on International Equity Mutual Funds

We study whether sub-advising abroad provides an information advantage that improves the performance of U.S. international equity mutual funds. We find evidence to the contrary. Funds that hire outsourced international sub-advisors underperform on a risk-adjusted basis by up to 135 bps annually. We further demonstrate that the underperformance of outsourced funds is concentrated in those managed by entrenched single sub-advisors, who are less likely to be terminated after poor performance compared to sub-advisors working in teams. Finally, we dissect a fund’s performance by the geography of its sub-advisors and show that internationally outsourced funds underperform primarily in their local holdings.