Redemption fees successfully protect mutual funds from short-term traders, whose churning can serious hurt fund performance, according to “Redemption Fees: Reward for Punishment,” authored by three researchers at Texas Tech University’s Division of Personal Financial Planning.
The report was presented this week at the 2010 Morningstar Ibbotson Conference in Orlando, Fla.
In fact, redemption fees can boost returns in small-cap and micro-cap funds by as much as 3.27%, the professors said.
“Mutual funds initiated redemption fees mainly to show investors that they were serious about reducing abusive short-term trading practices,” noted Associate Professor Michael S. Finke, one of the authors. “The fees didn’t improve performance in funds that invested in larger, more liquid securities. However, micro- and small-cap funds saw a significant increase in performance after they imposed the fees.
“Unfortunately, redemption fees have a marketing problem since they are labeled a fee instead of what they actually are: a transfer from short-term to long-term investors,” Finke continued.
The researchers also found that many fund companies have begun eliminating the redemption fees. “Our research shows that long-term investors should seek out funds that impose fees on short-run redemptions,” Finke said.