A new study from Boston-based Financial Research Corp. finds that sub-advised funds are one of the last fast growing segments of the mutual fund industry, as firms seek top performance for their products.

In a new U.S. study entitled “Creating a Best in Class Family of Products: The 2001 Sub-Advised Mutual Fund Report”, FRC documents the rapid expansion of fund companies employing specialized sub-advisors to enhance the performance of those funds which cannot be competitively managed in-house.

This trend has been well established over the past several years, but gained even more momentum in 2000 as a difficult investment climate caused investors to become increasingly sensitive to the relative performance of their funds.

FRC’s study found: the sub-advised segment continues to grow faster than the internally managed segment by a substantial margin. In 2000, internally managed assets for long-term funds actually dropped by 2.9% while the sub-advised segment of the industry grew by 9.1%.

Net sales remained very strong for sub-advised mutual funds; the outsourcing of existing funds became significant for the first time during 2000. According to the report, the average sub-advised U.S. equity fund outperformed its internally managed counterpart by an average of 73 basis points per year for the past five years.

The overall average expense ratio for sub-advised funds is 1.22% or roughly 14% higher than internally managed funds. As well, sub-advisors now manage one out of every five international equity portfolios available in the U.S. mutual fund market, and slightly more than one out of every seven U.S. equity portfolios.

“Sub-advisory services have now entered the mainstream of the fund industry,” says study author John Benvenuto. “Asset managers are finding new ways to benefit from sub-advisory relationships both as providers of their own distinct management expertise, and as purchasers of the unique capabilities of other top managers. This is helping to rationalize the fund industry, improving the quality of product lines at a wide variety of families both large and small.”

These conclusions fly in the face of recent research from Toronto’s Investor Economics Inc., which found that big Canadian players are moving away from sub-advisors, bringing more fund management in-house, as a way to defend profit margins in a rough market.