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Is the Price of Money Managers Too Low?

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Author Info
Huberman, Gur

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Abstract

Although established money managers operate in an environment which seems competitive, they also seem to be very profitable. The present value of the expected future profits from managing a collection of funds is equal to the value of the assets under management multiplied by the profit margin, assuming that the managed funds will remain in business forever, and that there will be zero asset flow into and out of the funds, zero excess returns net of trading costs, a fixed management fee proportional to the assets under management and a fixed profit margin for the management company. A profit margin of 30% seems empirically reasonable, but money management companies seem to trade at 2-4% of assets under management. Attempts to reconcile the two figures are not compelling, which is disturbing considering the centrality of the present value formula to finance and economics. Another computation suggests that holders of actively managed funds typically lose about 12% (18%) of their assets if they hold the fund for 20 (30) years, as compared with a loss of less than 3% (5%) for low-cost index fund investors for similar holding periods.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6531.

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Date of creation: Oct 2007
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Handle: RePEc:cpr:ceprdp:6531

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Related research
Keywords: managed fund; money manager; trading;

Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
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  9. Warther, Vincent A., 1995. "Aggregate mutual fund flows and security returns," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 209-235. [Downloadable!] (restricted)
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