Advanced Search
MyIDEAS: Login to save this paper or follow this series

On the Size of the Active Management Industry

Contents:

Author Info

  • Lubos Pastor
  • Robert F. Stambaugh

Abstract

We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w15646.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15646.

as in new window
Length:
Date of creation: Jan 2010
Date of revision:
Publication status: published as ĽuboÅ¡ Pástor & Robert F. Stambaugh, 2012. "On the Size of the Active Management Industry," Journal of Political Economy, University of Chicago Press, vol. 120(4), pages 740 - 781.
Handle: RePEc:nbr:nberwo:15646

Note: AP
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Dimitri Vayanos & Paul Woolley, 2011. "An institutional Theory of Momentum and Reversal," FMG Discussion Papers, Financial Markets Group dp666, Financial Markets Group.
  2. Anthony W. Lynch & David K. Musto, 2003. "How Investors Interpret Past Fund Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 58(5), pages 2033-2058, October.
  3. Joshua M. Pollet & Mungo Wilson, 2008. "How Does Size Affect Mutual Fund Behavior?," Journal of Finance, American Finance Association, American Finance Association, vol. 63(6), pages 2941-2969, December.
  4. Klaas Baks & Andrew Metrick & Jessica Wachter, . "Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-99, Wharton School Rodney L. White Center for Financial Research.
  5. Leonid Kogan & Stephen A. Ross & Jiang Wang & Mark M. Westerfield, 2006. "The Price Impact and Survival of Irrational Traders," Journal of Finance, American Finance Association, American Finance Association, vol. 61(1), pages 195-229, 02.
  6. Petajisto, Antti, 2009. "Why Do Demand Curves for Stocks Slope Down?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(05), pages 1013-1044, October.
  7. Avramov, Doron & Wermers, Russ, 2006. "Investing in mutual funds when returns are predictable," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(2), pages 339-377, August.
  8. Thomas Dangl & Youchang Wu & Josef Zechner, 2008. "Market Discipline and Internal Governance in the Mutual Fund Industry," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2307-2343, September.
  9. Veronica Guerrieri & Péter Kondor, 2009. "Fund Managers, Career Concerns, and Asset Price Volatility," NBER Working Papers 14898, National Bureau of Economic Research, Inc.
  10. Pastor, Lubos & Stambaugh, Robert F., 2002. "Investing in equity mutual funds," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 351-380, March.
  11. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "The Price Impact of Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 892-925.
  12. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp100, International Center for Financial Asset Management and Engineering.
  13. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
  14. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1655-1703, 08.
  15. Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 57(3), pages 417-443, September.
  16. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(3), pages 546-559, March.
  17. Luboš Pástor & Robert F. Stambaugh, . "Mutual Fund Performance and Seemingly Unrelated Assets.”," CRSP working papers 527, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  18. García, Diego & Vanden, Joel M., 2009. "Information acquisition and mutual funds," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1965-1995, September.
  19. Malkiel, Burton G, 1995. " Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 549-72, June.
  20. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  21. Jennifer Huang & Kelsey D. Wei & Hong Yan, 2007. "Participation Costs and the Sensitivity of Fund Flows to Past Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 62(3), pages 1273-1311, 06.
  22. Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, American Finance Association, vol. 63(4), pages 1537-1573, 08.
  23. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  24. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(3), pages 667-689, March.
  25. Khorana, Ajay & Servaes, Henri & Tufano, Peter, 2005. "Explaining the size of the mutual fund industry around the world," Journal of Financial Economics, Elsevier, Elsevier, vol. 78(1), pages 145-185, October.
  26. Chordia, Tarun, 1996. "The structure of mutual fund charges," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(1), pages 3-39, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Wagner, Niklas & Winter, Elisabeth, 2013. "A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 21(C), pages 69-85.
  2. Pástor, Luboš & Stambaugh, Robert F. & Taylor, Lucian, 2014. "Scale and Skill in Active Management," CEPR Discussion Papers 9854, C.E.P.R. Discussion Papers.
  3. Clemens Sialm & T. Mandy Tham, 2011. "Spillover Effects in Mutual Fund Companies," NBER Working Papers 17292, National Bureau of Economic Research, Inc.
  4. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(3), pages 546-559, March.
  5. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
  6. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  7. Diane Del Guercio & Jonathan Reuter, 2011. "Mutual Fund Performance and the Incentive to Generate Alpha," NBER Working Papers 17491, National Bureau of Economic Research, Inc.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. On the Size of the Active Management Industry (JPE 2012) in ReplicationWiki

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:15646. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.