Skill and Fees in Active Management

40 Pages Posted: 1 Jul 2019

See all articles by Robert F. Stambaugh

Robert F. Stambaugh

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

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Date Written: June 2019

Abstract

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.

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Suggested Citation

Stambaugh, Robert F., Skill and Fees in Active Management (June 2019). NBER Working Paper No. w26027. Available at SSRN: https://ssrn.com/abstract=3412701

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
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