The Mismatch between Mutual Fund Scale and Skill

60 Pages Posted: 9 Nov 2017  

Yang Song

Stanford University, Graduate School of Business, Students

Date Written: August 1, 2017

Abstract

I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors behave as though they rely on the Capital Asset Pricing Model. They confuse the effects of fund exposures to other common factors with managerial skill. Actively managed mutual funds with positive factor-related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark-adjusted performance of all actively managed equity mutual funds is caused mainly by the poor performance of this small subset of oversized funds. My model predicts that less skilled active fund managers tilt their portfolios toward common factors in order to gather more flows and collect more fees. I find empirical evidence consistent with the model's predictions.

Keywords: Mutual fund, Skill, Scale

Suggested Citation

Song, Yang, The Mismatch between Mutual Fund Scale and Skill (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=3065700 or http://dx.doi.org/10.2139/ssrn.3065700

Yang Song (Contact Author)

Stanford University, Graduate School of Business, Students ( email )

655 Knight Management Way
Stanford, CA 94305
United States

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