Skill, Scale, and Value Creation in the Mutual Fund Industry

AuthorP. Gagliardini, O. Scaillet, L. Barras
JournalThe Journal of Finance
Date18 Feb. 2022
CategoryAcademic Publications
Volume77(1)
Page numbers601–638

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.