4 Signs That Your Money Manager Tried To Screw You Over This Week

window dressing curtains

Mutual fund clients often look at the top holdings on quarterly statements to assess their fund manager’s investment decisions.However, the top holdings may misrepresent how the manager actually invested.

At the end of each quarter, some fund managers will buy stocks that did well during the quarter and sell stocks that didn’t.  This practice is called “window dressing.”  And it’s generally accepted that window dressing occurs (you can find research here).

There’s been a lot of talk about window dressing this week because as the bad quarter is coming to an end, some of the over-owned momentum stocks got really crushed. You could surmise that no fund manager wants to admit that they owned, say, Netflix this quarter.

Not only is it misleading, it costs you money, since all trading costs money.

But how can you detect window dressing in a fund? And how do those funds actually perform? Vikas Agrawal, Gerald Gay, and Leng Ling set out to answer these questions.  They analysed actively-managed mutual funds over the period 1984-2008.

Here’s what they found:

  • Window dressers are ‘unskilled’ and perform poorly during the quarter.
  • Window dressers charge higher fees, as measured by higher expense ratios.
  • Window dressers trade more heavily, especially near the end of the quarter.
  • Window dressers underperform in subsequent quarters.

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