Skill and Fees in Active Management

44 Pages Posted: 25 Mar 2019 Last revised: 11 Nov 2019

See all articles by Robert F. Stambaugh

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 8, 2019


Greater skill of active investment managers can mean less fee revenue in general equilibrium. More-skilled managers generate more revenue than less-skilled managers, but if all active managers become more skilled, less fee revenue can result. Although each manager then better identifies return opportunities, active managers in aggregate also correct prices better and thereby reduce each manager's returns. The latter effect can dominate, leading investors to allocate less to active managers. The model delivers implications consistent with existing evidence as well as a novel link between a fund’s fee revenue and the correlation between the fund's portfolio weights and future returns.

Keywords: active management, institutional investors, market efficiency

JEL Classification: G14, G23

Suggested Citation

Stambaugh, Robert F., Skill and Fees in Active Management (November 8, 2019). Available at SSRN: or

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
University of Pennsylvania
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United States
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National Bureau of Economic Research (NBER)

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