Working Paper: NBER ID: w22982
Authors: Joseph Gerakos; Juhani T. Linnainmaa; Adair Morse
Abstract: Using a dataset of $17 trillion of assets under management, we document that actively-managed institutional accounts outperformed strategy benchmarks by 86 (42) basis points gross (net) during 2000–2012. In return, asset managers collected $162 billion in fees per year for managing 29% of worldwide capital. Estimates from a Sharpe (1992) model imply that their outperformance comes from factor exposures ("smart beta"). If institutions had instead implemented mean-variance portfolios of institutional mutual funds, they would not have earned higher Sharpe ratios. Recent growth of the ETF market implies that asset managers are losing advantages held during our sample period.
Keywords: asset management; institutional performance; smart beta; tactical factor allocations
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| If institutions had managed their assets in-house using mean-variance portfolios (G11) | Higher Sharpe ratios than those realized by asset managers (G19) |
| Smart beta investing (G11) | Institutional asset managers outperformed strategy benchmarks by 42 basis points net (G23) |
| Delegation to asset managers (G23) | Performance advantage (D29) |