Research by Assistant Professor of Finance Woodrow Johnson at the University of Oregon's Lundquist College of Business finds that short-term shareholders impose more transaction costs on mutual funds than long-term shareholders, who end up subsidizing these costs.
Johnson finds that mutual funds can predict whether individual shareholders will have long or short investment horizons, and that the funds can predict the extra cost imposed by short-term investors. Despite this, all shareholders still receive the same price. The study, "Predictable Investment Horizons and Wealth Transfers among Mutual Fund Shareholders," was published in the October 2004 issue of The Journal of Finance.
"Giving all shareholders the same price for funds is akin to a life insurance company charging the same premium to twenty- and eighty-year-old applicants," said Johnson. "Current proposals to increase the use of redemption fees will help mitigate the problem of short-term traders, but the proposals fail to completely solve the problem."
Although recent mutual fund scandals have caused policymakers to advocate for treating all shareholders the same, Johnson's article maintains that short-term shareholders should be charged for the extra costs they impose on a fund.
The University of Oregon's finance department is one of the leading centers of mutual fund research in the nation. Johnson joined the faculty in 2002 after graduating with distinction from Columbia University's Graduate School of Business.
Johnson's paper appears in the October 2004 issue of The Journal of Finance (Vol. 59, No. 5).
The Journal of Finance publishes research across all the major fields of financial research. It is the most widely cited academic journal on finance and one of the most widely cited journals in all of economics.