TY  - JOUR
AU  - Pastor,Lubos
AU  - Stambaugh,Robert F.
TI  - On the Size of the Active Management Industry
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15646
PY  - 2010
Y2  - January 2010
UR  - http://www.nber.org/papers/w15646
L1  - http://www.nber.org/papers/w15646.pdf
N1  - Author contact info:
Lubos Pastor
University of Chicago
Booth School of Business
5807 South Woodlawn Ave
Chicago, IL  60637
Tel: 773/834-4080
Fax: NA
E-Mail: lubos.pastor@chicagobooth.edu

Robert F. Stambaugh
Finance Department
The Wharton School
University of Pennsylvania
Philadelphia, PA   19104-6367
Tel: 215/898-5734
Fax: 215/898-6200
E-Mail: stambaugh@wharton.upenn.edu
AB  - 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.
ER  -