51 Pages Posted: 5 Feb 2014
Date Written: January 31, 2014
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 out-perform 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.
Suggested Citation: Suggested Citation
Pastor, Lubos and Stambaugh, Robert F. and Taylor, Lucian A., Scale and Skill in Active Management (January 31, 2014). Becker Friedman Institute for Research in Economics Working Paper No. 2014-03. Available at SSRN: https://ssrn.com/abstract=2390285 or http://dx.doi.org/10.2139/ssrn.2390285