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Johnsen Working Paper Cited in Barron's Article

Investors will crowd into successful mutual funds until they are no longer successful, a phenomenon not unlike the "tragedy of the commons" in which villagers in medieval times allowed livestock to overgraze the village commons until eventual mass destruction of the areas resulted in starvation or abandonment. A Barron's article cites Professor D. Bruce Johnsen's economic analysis likening the mutual fund industry to a commons.

Commentary: Go Fish -- The tragedy of the commons can occur at sea, and on Wall Street, Barron's, December 4, 2006. By Thomas G. Donlen.

"Economic analysis brought more math to the tragedy of commons, and provided a theoretical limit to the extreme case in which all the villagers move away or starve. It turns out that the villagers will buy more sheep and the fishermen will buy more boats and nets or traps only up to the point that their added capacity pays off with added productivity.

"We recently encountered a treatise in economic science that suggests that many investors are in the same predicament as medieval villagers, Canadian cod fishermen and Chesapeake oystermen.

"The mutual-fund industry is something of a commons, says D. Bruce Johnsen of the George Mason University School of Law. He sees the skill of stock-picking as a scarce resource that will be exploited to the limit, like the oysters that must be dredged, the fish that must be fished or the grass that must be eaten before someone else gets to them.

"'Any expected abnormal returns are a nonexclusive rent subject to competitive dissipation by investors racing to establish first possession,' Johnsen says in a working paper. 'Among the universe of potential fund investors, none has the ability to exclude others from sharing in the surplus from expected abnormal returns by a given fund manager. Just as in an open-access fishery, the prospect of capturing rents [abnormal returns] invites entry. Entry continues until the average product of the fishery exactly equals the marginal entrants' alternative earnings and all surplus is dissipated.

"'Although existing fund shareholders can capture any unexpected abnormal returns that arise by chance, investors fairly anticipate abnormal returns in advance of their realization, no doubt aided by standardized performance advertising, serial persistence in performance, rational expectations, and the information aggregation function of formal and informal markets.'"