Most in Mutual Funds Don’t Trade Often

The average mutual-fund investor doesn’t trade shares as much as redemption rates suggest, according to the Investment Company Institute, the main trade group for the $7.2-trillion U.S. fund industry.

A new institute report found that relatively few fund shareholders account for a disproportionate amount of total redemptions, making redemption rates an inaccurate gage of how long the average investor holds shares.

“The typical fund shareholder actually redeems infrequently,” said institute senior economist Brian Reid during a conference call. “What’s even more striking is that this behavior doesn’t appear to have changed appreciably during the past 10 years,” he said.

Though anecdotal evidence suggests some fund investors have shortened holding periods, “Everything that we can see just doesn’t support that notion,” Reid added.

In an example of how active traders can distort redemption rates, a fund for which all investors hold their shares seven years would have a redemption rate of 14%. If investors representing just 2% of the assets redeem every month, the redemption rate jumps to 38%. Still, the average holding period in the second case, at 6.9 years, is nearly identical to the first, the institute said.

A 1999 survey of equity fund holders by the institute and the Securities Industry Assn. found that 82% had not redeemed any shares in a year, while 9% said they had redeemed once. A small percentage traded frequently.

Fidelity Investments, the biggest U.S. mutual-fund company, and Putnam Investments, the fourth-largest, recently announced plans to impose fees to discourage short-term trading.

Fidelity said it will institute a 75 basis point fee, effective after the market closes Wednesday, on shares of its Fidelity Mid-Cap Stock Fund, its third best-selling fund last year, that are sold within 30 days of purchase.

Putnam said it will impose redemption fees on two funds, Putnam Emerging Markets Fund and Putnam Asia Pacific Growth Fund. Shares purchased after Thursday will be subject to a 1% fee if investors redeem or exchange out within 90 days of purchase.

“It’s really meant to stifle the activity of this small number of active traders,” Reid said.