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On the Size of the Active Management Industry

  • Lubos Pastor
  • Robert F. Stambaugh

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.

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

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Date of creation: Jan 2010
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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
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