Skill and Fees in Active Management
39 Pages Posted: 25 Mar 2019 Last revised: 26 Jun 2019
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: Suggested Citation