What is ‘window dressing’
Window dressing is a strategy used by mutual Fund and other portfolio managers near the year or quarter end to improve the appearance of the work of the Fund before submitting it to clients or shareholders. To window dress, the Fund Manager sells stocks with large losses and purchase high flying stocks at the end of the quarter. These securities are transferred to the Fund.
Breaking down the ‘window dressing’
Reports on the budget execution, as well as a list funds in a mutual Fund are usually sent to clients every quarter, and clients use these reports to monitor the investment returns of the Fund. When performance is not enough, mutual Fund managers, can use window dressing to sell the shares, which reported significant losses, replacing them with reserves, expected to bring profit in the short term, to improve the overall performance of the Fund during the reporting period.
Another variation of window dressing is investing in stocks that do not match the style of the mutual Fund. For example, precious metals Fund may invest in stocks in a hot sector at a time, masking of the Fund and investment beyond the investment strategy of the Fund.
An example of window dressing
A Fund that invests exclusively in shares of the S&P 500 index lower index. Stocks A and B surpassed the overall index, but are underweight in the Fund. The indices C and D were overweight in the Fund, but lagged behind the index. To make it similar to a Fund invests in shares of A And B all together, a portfolio Manager sells from stocks C and D, replacing them, and giving the overweight in stocks A and B.
To Monitor The Effectiveness Of The Fund
For investors, the show provides another good reason to monitor closely the performance reports of the Fund. Some Fund managers may try to enhance returns through the show, which means that investors should be wary holdings, which seems to be consistent with the overall strategy of the Fund. The act of window dressing is under close attention of researchers of investment and regulators with potential upcoming regulations that might require more immediate and greater transparency of the company at the end of the reporting period.
And the show in General, can help the Fund’s returns in the short term, the long-term effects of the portfolio is generally negative. Investors should pay close attention to the stocks that appear outside the Fund’s strategy. While these funds may show a shorter execution time, for a long time, these types of investments are a drag on the return of the portfolio and the portfolio Manager often can’t hide poor performance for long. Investors will certainly determine these types of investments, and the result is often lower confidence in the Manager of the Fund and increasing the outflow of Fund.
Window dressing also occurs in various other industries to improve the profitability of the company. The company can offer products at reduced prices or to advertise special offers which increase sales at the end of the period. These promotional efforts are aimed at increasing the profitability in the last days of the reporting period.
Who is involved in the show
Although disclosure rules are intended to assist in increasing transparency for investors, a show can still hide the practice Manager of the Fund. Research Ivan Meyer and Ernst Schaumburg northwestern University found that certain characteristics of the Fund could signal that the Manager may engage in window dressing. In particular, the growth funds with high turnover and the Manager, which recently posted more often bad returns window dress.