Monday, December 22, 2008

Window Dressing and Other Mutual Fund Games

What do the following terms have in common?
  • Window Dressing
  • Painting The Tape/Banging The Close
  • Comparison Shopping
The answer is that they're all games that mutual fund managers play at the end of the year to make their portfolios' performance look better. The Investing section of today's Wall Street Journal has a short piece that describes these games:
  • Window dressing happens when the portfolio manager sells off securities just before the end of the reporting period so that they don't show up in the annual (or quarterly) listing o the portfolio's securities.
  • Painting the Tape (also called Banging the Close) occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
  • Comparison Shopping could also be called "benchmark shopping". This refers to the idea that if a fund manager can't beat his benchmark, he just switches to a new benchmark that he can beat.
Read the whole thing here.