Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders

Abstract

This study analyzes the distribution of investment horizons in a large, proprietary panel of all shareholders in one no-load mutual fund family. A duration model shows that there are observable shareholder characteristics that enable the fund to predict reliably on the day each account is opened whether the account will be short-term or long-term. A simulation shows that the costs imposed on the fund by the expected short-term shareholders are greater than those imposed by the expected long-term shareholders. The pooling of both investor types in one fund costs the expected long-term shareholders 51 basis points annually in foregone returns. Trade-offs between pooling and separating predictably different shareholders are discussed.

Keywords: mutual funds, investment horizons, wealth transfers, pooling externalities, pricing, shareholder behavior, duration

JEL Classification: G1, G2, D1, C41