Marketing and distribution expenses are responsible for about one-third of the cost of active management in the mutual fund industry. Estimating a structural model with costly investor search and learning about fund skill, we find that marketing is nearly as important as performance and fees in determining fund size. Eliminating marketing substantially improves welfare: capital shifts toward cheaper funds and competition decreases fees; active funds shrink and capital allocation becomes more closely aligned with skill. Declining investor search costs imply a reduction in marketing expenses and management fees as well as a shift toward passive investing, as observed empirically.

We decompose mutual fund value added by the length of funds' holdings using transaction‐level data. We motivate our decomposition with a model featuring horizon‐specific investment ideas, where short‐term ideas are less scalable because the associated trades cannot be spread over time. Fund turnover correlates negatively with the horizon over which value is added and positively with price impact costs. As predicted, holdings of high‐turnover funds add a substantial amount of value in the first two weeks, of which more than 80% is earned on Federal Open Market Committee (FOMC) and earnings announcement days. Holdings of low‐turnover funds add value only over longer horizons.