Skill, Scale, and Value Creation in the Mutual Fund Industry

99 Pages Posted: 31 Oct 2018 Last revised: 22 Jan 2021

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Patrick Gagliardini

University of Lugano; Swiss Finance Institute

O. Scaillet

University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics

Date Written: July 8, 2020

Abstract

We develop a flexible and bias-adjusted approach to jointly examine skill, scale, and value added across individual funds. We find that the value added is (i) positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period possibly due to investors’ learning. We also show that the skill and scale coefficients (i) vary substantially across funds, and (ii) are strongly positively correlated–two features that shape the value added distribution. These results are consistent with theoretical models in which the sensitivity to diseconomies of scale are fund-specific and funds have bargaining power over investors.

Keywords: Mutual funds, skill, scale, value added, nonparametric estimation, large panel, error-in-variable bias

JEL Classification: G11, G12, C14, C33, C58

Suggested Citation

Barras, Laurent and Gagliardini, Patrick and Scaillet, Olivier, Skill, Scale, and Value Creation in the Mutual Fund Industry (July 8, 2020). Swiss Finance Institute Research Paper No. 18-66, Available at SSRN: https://ssrn.com/abstract=3269995 or http://dx.doi.org/10.2139/ssrn.3269995

Laurent Barras (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Patrick Gagliardini

University of Lugano ( email )

Via Buffi 13
Lugano, TN 6900
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Olivier Scaillet

University of Geneva GSEM and GFRI ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+ 41 22 379 88 16 (Phone)
+41 22 389 81 04 (Fax)

HOME PAGE: http://www.scaillet.ch

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics

Geneva
Switzerland

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