Internationally based subadvisors don’t measurably improve the performance of mutual funds that focus on markets abroad, according to the winning research paper of this year’s CFA Society Toronto and Hillsdale Canadian Investment Research Award.
The paper, Does Subadvising Abroad Improve the Performance of International Mutual Funds?, by Pauline Shum Nolan and Michael Densmore of York University, and Markus Broman of Syracuse University, finds that “managers with a foreign presence do not have an information edge in international investing,” Chris Guthrie, president and CEO at Hillsdale Investment Management Inc., says in a statement.
“This is especially important for Canadian managers as it suggests that they are not disadvantaged by being in Canada,” Guthrie says.
In the statement, Harry Marmer, executive vice-president at Hillsdale Investment Management, says the paper’s important strategic takeaway for the Canadian money management industry is “be local and think global.”
The paper find that, adjusting for global risk factors, hiring subadvisors abroad doesn’t improve fund performance, suggesting the subadvisors are unable to exploit local information.
Further, the paper’s abstract says “funds that hire outsourced, rather than in-house, international subadvisors underperform on a risk-adjusted basis by up to 122 [basis points] annually, relative to funds that are not subadvised.” That underperformance can partly be explained by internationally outsourced subadvisors being less active in managing the assets, particularly in their local holdings, it says.
CFA Society Toronto and Hillsdale Investment Management Inc. will award the authors a $10,000 prize at an annual awards reception on Feb. 28.