A study published in the recent issue of The Journal of Finance has found that short term shareholders impose more transaction costs on mutual funds than long-term shareholders, who end up subsidizing these costs.
Interestingly, mutual funds can predict which shareholders will have long or short investment horizons, and they can also predict the costs incurred by short-term investors. Despite this, all shareholders still receive the same price. Professor Woodrow Johnson, author of a recent study published in The Journal of Finance, argues that giving all shareholders the same price for funds is “akin to a life insurance company charging the same premium to 20- and 80-year-old applicants.” Although recent mutual fund scandals have caused policymakers to advocate for treating all shareholders the same, the article maintains that short-term shareholders should be charged for the costs they impose on a fund.
This study is published in the current issue of The Journal of Finance.