NATIONAL BUREAU OF ECONOMIC RESEARCH
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Fund Tradeoffs

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

NBER Working Paper No. 23670
Issued in August 2017, Revised in May 2019
NBER Program(s):Asset Pricing

We study tradeoffs among active mutual funds' characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. We also confirm other model-predicted tradeoffs: Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.

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Document Object Identifier (DOI): 10.3386/w23670

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