(PUB) Investing 2015

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Making the Most of Funds With More Than One Subadvisor The Contrarian | Russel Kinnel

It can be a lot to keep track of if you have, for instance, six subadvisors on a fund. Say a couple of years after you own a fund, the advisor swaps out two of six subadvisors and you don’t know much about the new ones. What do you do? Making the Most of Multiple-Subadvisor Funds Because of the added level of diversification, these work best in a couple of situations. One, you plan to own only one or two funds in each asset class. If you want just one or two foreign funds, funds like Litman Gregory Masters International MSILX are a good idea. In addition, these funds can be nice low- maintenance funds for accounts like 401 (k)s and IRA s where you don’t want to mess around. Morning- star has Vanguard International Growth VWIGX in its lineup, and its low-cost diversified portfolio is a welcome source of stability. With so many moving parts, it’s even more important to know why you own a multiple-subadvisor fund and stay focused on that. While Masters tends to divvy up roughly equal parts of its fund to its subadvisors, Vanguard often has one or two dominant managers running most of the money. Those are the ones to pay attention to. At the aforementioned Vanguard International Growth, Baillie Gifford runs half the money, Schroder runs one third, and M & G runs 13% . There have been manager changes at Schroder and M & G, but Baillie Gifford is the key piece of the equation, and we’ve maintained our Morningstar Analyst Rating of Silver. Or it could be you are in a Masters fund because there’s a really good manager you couldn’t otherwise gain access to. If that manager leaves or becomes more directly accessible, you might reconsider your investment. œ

Multiple-subadvisor funds are a breed apart. Let’s take a look at how they work and how you can make the most of them. Some firms like Vanguard, Litman Gregory Masters, and American Beacon have multiple firms running sleeves of a portfolio at the same time. Let’s take a look at the strengths and weaknesses of that setup. Strengths You get added strategy diversification when you have multiple managers. Even a value fund could have strategy diversification if one is deep-value, another is dividend-driven, and a third is relative-value. In addition, each manager and firm has strengths and blind spots. By combining a few of them, you tone down the extremes. In addition, having multiple subadvisors can make for easier and smoother transitions. Say there’s a problem at one subadvisor. The advisor that oversees them can move money to existing subadvisors or to a new one without rocking the boat too much. Weaknesses With the obvious exception of Vanguard, you now have to build in two profit margins to fees, as both the advisor and subadvisor are aiming to make money. And if the subadvisor is really in demand, it may charge more in this setup than it does for people investing directly with it. You might also get more diversification than you need. Masters generally limits subadvisors to 10 – 20 hold- ings in order to avoid the issue. But American Beacon and Vanguard more often have their subadvisors simply run the same portfolio they are running else- where, thus building an overall portfolio of many hundreds of names.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.