The Mismatch Between Mutual Fund Scale and Skill
Posted: 9 Nov 2017 Last revised: 26 Apr 2020
Date Written: Dec 12, 2019
I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active 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 active equity mutual funds is mainly caused by this small subset of oversized funds.
Keywords: Mutual fund, Skill, Scale
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