Skill and Fees in Active Management

39 Pages Posted: 25 Mar 2019 Last revised: 26 Jun 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: June 25, 2019


Greater skill of active investment managers can mean less fee revenue in a general equilibrium. Although more-skilled managers earn more revenue than less-skilled managers, greater skill for active managers overall can imply less revenue for their industry. Greater skill allows managers to identify mispriced securities more accurately and thereby make better portfolio choices. Greater skill also means, however, that active management corrects prices better and thus reduces managers' return opportunities. The latter effect can outweigh managers' better portfolio choices in equilibrium. Investors then rationally allocate less to active funds and more to index funds if active management is more skilled.

Keywords: active management, market efficiency

JEL Classification: G11, G14

Suggested Citation

Stambaugh, Robert F., Skill and Fees in Active Management (June 25, 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
Philadelphia, PA 19104-6367
United States
215-898-5734 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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