Skill and Fees in Active Management
39 Pages Posted: 25 Mar 2019
Date Written: January 14, 2019
Greater skill of active investment managers can mean less fee revenue in equilibrium. Although more-skilled managers receive 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 a general 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