Scale and Skill in Active Management

Lubos Pastor, Robert Stambaugh and Lucian A. Taylor

No 19891, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level: As the size of the active mutual fund industry increases, a fund's ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, but estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund's lifetime. This result can also be explained by industry-level decreasing returns to scale.

JEL-codes: G10 G23 J24 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-bec, nep-hrm, nep-lma and nep-sog
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Published as Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45.

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Journal Article: Scale and skill in active management (2015)
Working Paper: Scale and Skill in Active Management (2014)
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