Critical Finance Review > Vol 11 > Issue 3-4

Scale and Performance in Active Management are Not Negatively Related

John Adams, University of Texas at Arlington, USA, , Darren Hayunga, University of Georgia, USA, , Sattar Mansi, Virginia Tech, USA,
Suggested Citation
John Adams, Darren Hayunga and Sattar Mansi (2022), "Scale and Performance in Active Management are Not Negatively Related", Critical Finance Review: Vol. 11: No. 3-4, pp 541-592.

Publication Date: 10 Aug 2022
© 2022 John Adams, Darren Hayunga and Sattar Mansi
Returns to scaleActive and passive managementData errorsIndex fundsInfluential observationsReplication


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In this article:
1. Sample Formation and Methodology 
2. Data Errors 
3. Empirical Results 
4. Non-Negative Economies-of-Scale Puzzle: Evidence from Index Funds Only 
5. Concluding Remarks 


We revisit the nature of returns to scale following Pástor et al. (2015). Using replicated versions of their domestic equity fund sample, we confirm their negative and significant relation between industry scale and performance. However, upon closer examination we find the diseconomies of scale at the industry level result is an artifact of data errors that comprise less than 0.05% of the sample—168 out of 332,516 observations—that occurred most often in the year 2000. We are unable to find industry level diseconomies of scale in the post 2001 era. A major source of these errors is the incorrect use of Morningstar’s current performance benchmarks to measure historical return performance. We confirm the non-result findings using Fama–French three-factor adjusted returns, which are not subject to benchmarking errors.