Fund tradeoffs

Lubos Pastor, Robert Stambaugh and Lucian A. Taylor

Journal of Financial Economics, 2020, vol. 138, issue 3, 614-634

Abstract: We study tradeoffs among active mutual funds’ characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio’s holdings but also on the portfolio’s diversification. We also confirm other model-predicted tradeoffs. Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger and cheaper, and they trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.

Keywords: Fund tradeoffs; Fund characteristics; Portfolio liquidity; Diversification (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Fund Tradeoffs (2017)
Working Paper: Fund Tradeoffs (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:3:p:614-634

DOI: 10.1016/j.jfineco.2020.06.005

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