On the Size of the Active Management Industry

44 Pages Posted: 6 Jan 2010 Last revised: 24 Jul 2012

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: July 23, 2012

Abstract

We argue that active management's popularity is not puzzling despite the industry's poor track record. Our explanation features decreasing returns to scale: As the industry's size increases, every manager's ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

Keywords: active management, returns to scale, learning, mutual funds

JEL Classification: G10, G20

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., On the Size of the Active Management Industry (July 23, 2012). CRSP Working Paper, Available at SSRN: https://ssrn.com/abstract=1532268 or http://dx.doi.org/10.2139/ssrn.1532268

Lubos Pastor

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
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National Bureau of Economic Research (NBER)

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