Locating Decision Rights: Evidence from the Mutual Fund Industry

Abstract

Mutual fund advisors make portfolio decisions for their funds on a daily basis. We examine the location of those portfolio decision rights on two dimensions. First, we consider the geographic location of the decision rights. Second, we consider whether the decision rights remain with an advisor or are outsourced to an independent sub-advisor. We argue that the allocation of portfolio decision rights involves a tradeoff between the opportunity cost of not matching decision rights with specific knowledge, and the agency costs associated with moving the decision rights to the specific knowledge. Patterns in the location of decision rights are consistent with that tradeoff being a meaningful determinant of the allocation of decision rights in the mutual fund industry. Additionally (and consistent with equilibrium), we find that risk-adjusted returns to sub-advised funds are greater than they would have been had the funds not been sub-advised, but indistinguishable from the returns produced by other funds.