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Skill, Scale, and Value Creation in the Mutual Fund Industry
Author(s) -
BARRAS LAURENT,
GAGLIARDINI PATRICK,
SCAILLET OLIVIER
Publication year - 2022
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13096
Subject(s) - economic rent , scalability , value (mathematics) , scale (ratio) , investment (military) , closed end fund , capital (architecture) , economics , fund of funds , monetary economics , microeconomics , business , computer science , machine learning , incentive , physics , archaeology , quantum mechanics , database , politics , political science , law , history
We develop a flexible and bias‐adjusted approach to jointly examine skill, scalability, and value‐added across individual funds. We find that skill and scalability (i) vary substantially across funds, and (ii) are strongly related, as great investment ideas are difficult to scale up. The combination of skill and scalability produces a value‐added that (i) is positive for the majority of funds, and (ii) approaches its optimal level after an adjustment period (possibly due to investor learning). These results are consistent with theoretical models in which funds are skilled and able to extract economic rents from capital markets.