Stock Market Window Dressing

Last night I wrote at the members' only website that I was surprised that we haven't seen any end-of-the-quarter window dressing yet. Sure enough, one day later, the pump and dumpers arrive right on cue.

So, what is window dressing? It is well-known and highly publicized strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. Performance reports and a list of the holdings in a mutual fund are usually sent to clients every quarter. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.

Another variation of window dressing is investing in stocks that don't meet the style of the mutual fund. For example, a precious metals fund might invest in stocks that are in a hot sector at the time, disguising the fund's holdings, so clients really have no idea what they are paying for. Ultimately, window dressing may make a fund appear more attractive, but you can't hide poor performance for long. That is, unless you practice the art of survivorship or you just fake the numbers as so many funds are doing these days.