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Making the Most of Funds With Multiple Subadvisors

Having multiple subadvisors makes investing a little trickier, but it's still worthwhile.

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.

Strengths
You should get added strategy diversification when you have multiple managers. Even a value fund could have strategy diversification if one strategy is deep-value, another is dividend-driven, and a third is relative-value. In addition, each manager and firm have strengths and blind spots. By combining a few of them, you tone down the extremes.

Having multiple subadvisors can also 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 holdings in order to avoid that issue. But American Beacon and Vanguard more often have their subadvisors simply run the same portfolio they are running else­where, 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, those like the five-subadvisor 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 IRAs where you don't want to mess around with the intricacies of trading, rebalancing, and monitoring too much. Morning­star has  Vanguard International Growth (VWIGX) in its lineup, a fund that uses three subadvisors, 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 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 the experienced and stable management at 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. (For example, Dick Weiss runs a sleeve of Litman Gregory Masters Equity (MSEFX) and that's it.) If that manager leaves or becomes more directly accessible, you might reconsider your investment.

 

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Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.