108 / 772
10
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.
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
Making the Most of Funds With
More Than One Subadvisor
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.