On the Benefits of Scale Economies in Asset Management

Abstract

Scale economies in asset management, coupled with strong competitive forces, have benefitted investors through greater market access and lower costs. The authors quantify these scale economies using data on 27,643 US open-end funds comprising $28.7 trillion in assets. Scale economies are pervasive and are experienced by both index and active managers. The authors develop a framework based on fund size and expense ratios to show that economies of scale in index management have led to significant reductions in costs for both index and, via competition, active investors. Using this framework, they evaluate a proposal by the Federal Trade Commission to amend antitrust regulations in a way that would significantly affect the ordinary course of investment activities of US asset managers and could reverse nearly three decades of cost reduction.