Had We But World Enough , and Time : What is the NPV of Expected Future Pro fi ts of Money Managers ? ∗

Although established money managers operate in an environment which seems competitive, they also seem to be very profitable. The present value of the expected future profits from managing a collection of funds is equal to the value of the assets under management times the profit margin, assuming that the managed funds will remain in business forever, zero asset flow into and out of the funds, zero excess returns net of trading costs, fixed management fee proportional to the assets under management and a fixed profit margin for the management company. A profit margin of 30% seems empirically reasonable, but money management companies seem to trade at 2-4% of assets under management. Attempts to reconcile the two figures are not compelling which is disturbing considering the centrality of the present value formula to finance and economics. Another computation suggests that actively managed fund holders typically lose over 20% (30%) of their assets if they hold the fund for 20 (30) years, compared with a loss of less than 3% (5%) for low-cost index fund investors for similar holding periods. ∗This is an evolving draft, and comments are very welcome. Please do not distribute or cite without the author’s permission. †Conversations with numerous colleagues at Columbia and elsewhere were instrumental to the ideas summarized in this work. I am especially grateful to Mikhail Chernov, Charles Jacklin (Mellon Capital), Charles Jones, Thomas Miles, Stephan Ross, , ??? Jose Martinez provided excellent research assitance.