Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders

33 Pages Posted: 22 Jul 2003

See all articles by Woodrow T. Johnson

Woodrow T. Johnson

U.S. Securities and Exchange Commission

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2003

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

Suggested Citation

Johnson, Woodrow T., Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders (May 16, 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=379241 or http://dx.doi.org/10.2139/ssrn.379241

Woodrow T. Johnson (Contact Author)

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549-9360
United States
202-551-6611 (Phone)

HOME PAGE: http://www.sec.gov/about/economic.shtml

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