Empirical evidence collected from a variety of shareholder surveys suggests that mutual fund shareholder redemption activity is not nearly as worrisome as the 40.9 percent rate of redemptions recorded in 2000 might indicate, according to a report issued last week by the Investment Company Institute.

With no direct data available on shareholder's holding periods, funds' rates of redemption have often been used to estimate shareholder redemption activity, according to the ICI. However, redemption rates are often not reflective of the average shareholder's holding period because a few shareholders account for the greatest percentage of redemptions.

The ICI has recently gleaned what it says is a better picture of shareholder redemption activity from several different surveys. The ICI drew its data from surveys conducted by academic institutions, the securities industry and its own surveys. For instance, previously unreleased data from a survey conducted by the ICI and the Securities Industry Association in 1999 indicates that 82 percent of equity fund investors did not make a single redemption or exchange in 1999. Nine percent of the investors that did redeem made one redemption, while one percent made more than six redemptions, according to the study.

Surprisingly, the study found that shareholders are less likely to redeem their equity fund shares within a 401(k) retirement plan than they are outside, even though redemptions made within a defined contribution plan are tax free. Eighty-nine percent of equity fund shareholders in retirement plans made no redemptions in 1999 compared to 82 percent of investors outside retirement plans, according to the data. A survey conducted by a Wharton and two Harvard professors and released last September backs up those numbers. That survey found that 73 percent of participants in large employer-sponsored plans made no changes in their asset allocations in the ten years covered by the survey and only three percent made six or more transactions in the same period.

Another study, by TIAA-CREF, examining the redemption behavior of 31,000 households with mutual fund accounts held at large brokerages found that at least 25 percent of the households never sold fund shares in a five and a half year period. The unpublished study was completed in September 2000 and examined both tax-deferred and taxable accounts. The study also found that half of the 31,000 accounts had an annual redemption and exchange rate of less than 16 percent.

Yet another series of surveys sponsored by the ICI adds to the evidence suggesting that funds' rates of redemptions have low correlation with shareholders' holding periods. In ICI surveys conducted in 1992, 1996, 1998 and 1999, an average of 74 percent of fund shareholders outside of retirement plans made no redemptions in a 12-month period. Yet available data on the annualized rate of redemption for stock funds in the past three years reveals that the percentage climbed as high as 41.6 percent in 2000, up from 34.8 and 34 percent in 1999 and 1998, respectively.

While there have been numerous studies examining shareholders' redemption behavior, it is difficult to measure holding periods because many investors have omnibus accounts, said John Collins, a company spokesperson.

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