Outsourcing of mutual funds' non-core competencies

I investigate the consequences for mutual funds' operational outcomes when fund families focus their efforts on their core competency, i.e. portfolio management, by outsourcing noncore activities to external providers. Specifically, I find that funds of families that outsource shareholder services have about 32 percent lower service fees than funds of families that cater for investors' service needs internally. Consistent with service outsourcing releasing tied resources that can be spent on families' core business, funds with delegated shareholder services outperform their peers by up to 91 basis points. This underperformance increases up to 136 basis points when outsourced funds are compared with internally administered funds that are also capable but choose not to outsource. Furthermore, these inhouse administered funds exhibit 10 percentage points lower growth rates per year and are more short-lived by up to a fifth. However, fund families' decision to team-manage funds can substantially reduce the negative performance consequences.