Window Dressing

What Is Window Dressing?

Window dressing is a strategy utilized by mutual fund and other portfolio managers to work on the presence of a fund's performance before introducing it to clients or shareholders. To window dress, the fund manager sells stocks with large losses and purchases high-flying stocks close to the furthest limit of the quarter or year. These securities are then reported as part of the fund's holdings.

The term can likewise allude to actions taken by companies to further develop their impending [financial statement](/financial-statements, for example, by delaying payments or finding ways of booking revenues prior.

How Window Dressing Works

Performance reports and a rundown of the holdings in a mutual fund are generally shipped off clients each quarter, and clients utilize these reports to monitor the fund's investment returns. At the point when performance has been lagging, mutual fund managers might utilize window dressing, selling stocks that have reported substantial losses and supplanting them with stocks expected to deliver short-term gains to work on the overall performance of the fund for the reporting period.

One more variation of window dressing is investing in stocks that don't meet the style of the mutual fund. For instance, a precious metals fund could invest in stocks in a hot sector at that point, camouflaging the fund's holdings and investing outside the scope of the fund's investment strategy.

Illustration of Window Dressing

A fund investing in stocks solely from the S&P 500 has failed to meet expectations the index. Stocks An and B outflanked the total index however were underweight in the fund, while stocks C and D were overweight in the fund yet lagged the index.

To make it seem as though the fund was investing in stocks An and B up and down, the portfolio manager sells out of stocks C and D, supplanting them with, and giving a overweight to, stocks An and B.

The act of window dressing is under close watch by investment scientists and regulators with possibly impending rules that could require more immediate and greater transparency of holdings toward the finish of a reporting period.

Monitor Your Fund Performance

For investors, window dressing gives one more valid justification to monitor your fund performance reports closely. Some fund managers could try to further develop returns through window dressing, and that means investors ought to be wary of holdings that appear to be off the mark with the fund's overall strategy.

Investors ought to pay close thoughtfulness regarding holdings that show up outside of a fund's strategy.

Window dressing can support a fund's returns in the short term, albeit longer-term effects on a portfolio are ordinarily negative. While these holdings might show higher short-term performance, over the long haul these types of investments drag on the portfolio's returns, and a portfolio manager can't frequently conceal poor performance for a really long time. Investors will certainly distinguish these types of investments, and the outcome is in many cases lower confidence in the fund manager and increased fund outpourings.

Who Engages in Window Dressing

However disclosure rules are expected to aid in expanding transparency for investors, window dressing can in any case cloud the practices of the fund manager. A study by Iwan Meier and Ernst Schaumburg of Northwestern University found that certain characteristics of a fund can signal that the manager might be taking part in window dressing. In particular, growth funds with high turnover and a manager who has as of late posted poor returns are all the more frequently the ones who will window dress.

Window dressing likewise happens across different industries. For example, companies can offer products at discounted prices or advance special arrangements that upgrade sales for the finish of the period. These promotional efforts look to increase the return in the last days of a reporting period.

Highlights

• Window dressing happens when portfolio managers try to help a fund's investment performance prior to investor or shareholder introductions.
• It very well may be recognized via carefully assessing a firm or fund's financial statements and searching for suspicious trades corresponding with the finish of a quarter or fiscal year.
• Window dressing can give the presence of better returns, however these strategies frequently essentially concede losses that will emerge later on.