Scale and Skill in Active Management

Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor

NBER Working Paper No. 19891
Issued in February 2014
NBER Program(s):   AP   CF   LS

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.

A non-technical summary of this paper is available in the June 2014 NBER digest.  You can sign up to receive the NBER Digest by email.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19891

Published: Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2015. "Scale and skill in active management," Journal of Financial Economics, Elsevier, vol. 116(1), pages 23-45. citation courtesy of

Users who downloaded this paper also downloaded these:
Gans w20162 "Selling Out" and the Impact of Music Piracy on Artist Entry
King and Low w19887 Measuring the ''World'' Real Interest Rate
Harvey, Liu, and Zhu w20592 . . . and the Cross-Section of Expected Returns
Berk and van Binsbergen w18184 Measuring Managerial Skill in the Mutual Fund Industry
Kelly, Pastor, and Veronesi w19812 The Price of Political Uncertainty: Theory and Evidence from the Option Market
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us