Sub-Advisors to Gain Popularity

While the choppy markets are no doubt keeping asset managers up at night, sub-advisors don’t have much to worry about. Demand for sub-advised mutual funds is expected to grow in the coming years, with assets to reach $2.2 trillion by 2016, according to Financial Research Corporation data. That’s a compound annual growth rate of 11 percent, FRC said.

That said, the sub-advisory industry is not expected to gain market share over the overall mutual fund industry. Lynette DeWitt, director of sub-advisory research at FRC said:

In summation, we believe asset levels overall will grow, but the market has matured, so growth will keep pace with the broader mutual fund market — but not take more share. Our industry projections retain a 14% ratio of sub-advised assets to total mutual fund assets

In addition, sub-advised variable annuities are expected to take more share of the industry, because of the focus on protection in volatile market conditions, DeWitt said.

Investment management firm American Beacon Advisors, which manages American Airlines’ defined benefit pension fund, put its sub-advisors front and center yesterday at a New York investment forum sponsored by the firm. Why the multi-manager approach? “We believe nobody has a monopoly on good ideas,” said Gene Needles, president and CEO.

The firm has 26 sub-advisory firms on its platform, representing $4 trillion AUM, Needles said. Such firms as Pzena Investment Management, MFS, Dreman Value Management, Evercore Asset Management and Lazard were represented at the forum.

But perhaps some of these guys saw the FRC data about the sub-advisory business, because despite the recent volatility, they had a pretty positive outlook. In fact, many of them are finding opportunities in the down markets. It’s just a matter of determining whether a manager has the skill to find those diamonds in the rough… That’s a more difficult task.

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