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Discussion Paper Details

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Title: Scale and Skill in Active Management

Author(s): Lubos Pástor, Robert F. Stambaugh and Lucian Taylor

Publication Date: March 2014

Keyword(s): mutual funds, returns to scale and skill

Programme Area(s): Financial Economics and Labour Economics

Abstract: We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level: As the size of the active mutual fund industry increases, a fund's ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, but estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund's lifetime. This result can also be explained by industry-level decreasing returns to scale.

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Bibliographic Reference

Pástor, L, Stambaugh, R and Taylor, L. 2014. 'Scale and Skill in Active Management'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9854