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

122 Pages Posted: 31 Oct 2018 Last revised: 3 Jun 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

Swiss Finance Institute - University of Geneva

Date Written: April 4, 2021

Abstract

We develop a flexible and bias-adjusted approach to jointly examine skill, scalability, and value added across individual funds. We find that skill and scalability (i) vary substantially across funds, and (ii) are strongly related as great investment ideas are difficult to scale up. The combination of skill and scalability produces a value added that (i) is positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period possibly due to investors' learning. These results are consistent with theoretical models in which funds are skilled and able to extract economic rents from capital markets.

Keywords: Mutual funds, skill, scale, value added, 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 (April 4, 2021). Journal of Finance, Forthcoming, 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

Swiss Finance Institute - University of Geneva ( email )

Geneva
Switzerland

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