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Fund tradeoffs

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  • Pástor, Ľuboš
  • Stambaugh, Robert F.
  • Taylor, Lucian A.

Abstract

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 and cheaper, and they trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.

Suggested Citation

  • Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2020. "Fund tradeoffs," Journal of Financial Economics, Elsevier, vol. 138(3), pages 614-634.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:3:p:614-634
    DOI: 10.1016/j.jfineco.2020.06.005
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    More about this item

    Keywords

    Fund tradeoffs; Fund characteristics; Portfolio liquidity; Diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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