In this article, we examine the research on (dis)ecconomies of scale for active management.

Diseconomies of Scale in Active Management: Robust Evidence

  • Lubos Pastor, Robert F. Stambaugh, Lucian A. Taylor, Min Zhu
  • Critical Finance Review, 2022
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the Research Questions?

Pastor, Stambaugh, and Taylor (2015) and Zhu (2018) provide significant evidence of decreasing returns to scale (DRS) at both the fund and industry levels. The authors examine the robustness of their inferences after Adams, Hayunga, and Mansi (2021) critique the above two studies.

What are the Academic Insights?

The authors find robust evidence of DRS at fund and industry levels. Their evidence reaffirms the conclusions of PST (2015) and Zhu (2018) but contradicts those of AHM. AHM’s conclusions are based on an asymmetric outlier-removal procedure that is biased and hard to justify ex-ante. In contrast, the author’s conclusions are based on a variety of evidence, including robust regression and two symmetric ways of removing outliers. After applying additional data-cleaning steps to a sample already carefully constructed by matching CRSP and Morningstar sources, they obtained that evidence. Neither those data-cleaning steps nor alternative benchmarks make a difference, dispelling AHM’s data-error narrative for the PST and Zhu results.

Why does it matter?

This study is important to the debate around (dis)economies of scale in the asset management industry.

The Most Important Chart from the Paper:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained.  Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.


We take a deeper look at the robustness of evidence presented by Pastor, Stambaugh, and Taylor (2015) and Zhu (2018), who find that an actively managed mutual fund’s returns relate negatively to both fund size and the size of the active mutual fund industry. When we apply robust regression methods, we confirm both studies’ inferences about scale diseconomies at the fund and industry levels. Moreover, data errors play no role, as both studies’ results are insensitive to applying various error screens and using alternative return benchmarks. We reject constant returns to scale even after dropping 25% of the most extreme return observations. Finally, we caution that asymmetric removal of influential observations delivers biased conclusions about diseconomies of scale.


Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen published a book on research-backed investment ideas, titled Smarte(er) Investing. How Academic Insights Propel the Savvy Investor. You can find additional information at Academic Insights on Investing.