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By Shehryar Khan, CFA | 05-30-2018

What to make of Mackenzie's subadvisor change?

The new in-house manager will have a very different process than the outgoing subadvisor.

Shehryar Khan: Mackenzie Investments announced a change in their emerging markets fund in May. They are bringing the management of the fund in-house to their newly formed quantitative boutique in Boston, and relieving their previous subadvisor, JP Morgan, of their duties. This is not entirely a surprise, given that when Mackenzie hired Arup Datta to lead the new team in December, it led to speculation of a change on this fund.

Firstly, one has to give the team at JP Morgan credit, as they have put up strong returns for Mackenzie and their investors, especially against the peers in the category, garnering a 5-star rating. At first glance, it's hard to say with any conviction that investors are better off today than they were with JP Morgan at the helm of the fund, and going forward, advisors and investors will have to question whether this new team will be able to replicate that success. They are using a very different process, taking a quantitative approach to picking stocks, which will again be a change from the bottom-up, fundamental approach taken by the former subadvisor.

Taking a fund in-house is never an easy decision, especially with obvious motivations like cost-savings always casting a firm's motives under suspicion. While history here is mixed, it's not a bad sign on its own. RBC Global Asset Management, for example, did it with success when they took put the foreign funds at PH&N that had been subadvised by Sky Investment Counsel and gave them to their in-house global equity manager Habib Subjally. Like in the case with Datta, Subjally had a strong track record at his previous firm and kept his team intact when joining GAM. What distinguishes RBC's case though, is that the fund had been underperforming under Sky.

For his part, Datta has built out his team to five people, all of whom worked for him when he was the chief investment officer of international equities at AJO, the firm he left to join Mackenzie. While that familiarity may reduce the time it takes to get them up to speed, it still does not compare to the sizeable team JP Morgan had at their disposal, a team that had an experienced manager but also analysts dispersed across countries giving them local expertise. He does however have a proven track record in the space that he's managing. Overall, making this change is a brave move on Mackenzie CIO Tony Elavia's part, showing conviction as nobody would have questioned him for staying the course with JP Morgan. In our investment management group, when evaluating our subadvisors, we don't wait for performance to suffer before pulling the trigger if we believe we have a good reason to make a manager change or have simply found a better option in an asset class, and that is what we hope Elavia is doing. He is, however, banking on Datta and his team fixing something that wasn't broken. Their investors will be hoping he's made the right decision.

For Morningstar Investment Management, I'm Shehryar Khan.

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