Finance concept explained: ‘Window Dressing’
You usually read it in the news:
Shares are expected to open higher Thursday, supported by Wall Street's advance and fund managers window dressing their portfolio before the third quarter ends.
- Philippine Daily Inquirer, September 27, 2007
What is window dressing?
Window dressing is arguably a deceptive strategy employed by fund managers in which they try to make their portfolio look as attractive as possible before presenting it to clients or stockholders.
The idea is to make the portfolio look good. Performance reports and a list of the holdings of the fund are usually sent to investors every quarter. In the days leading up to the end of the quarter, fund managers would sell stocks with large losses and purchase the recent winners. Doing so makes it appear that they own the best-performing stocks of the quarter.
Let's see an example of window dressing in action. Suppose at the start of the third quarter, a fund manager bought JOLLIVILLE HOLDINGS CORPORATION (Stock Code: JOH) at P5.00 per share in the hopes that its price will shoot up.
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During the last week of September, however, JOH has fallen to P1.90 per share, a 62% drop in value. Afraid that a losing stock would show up in his end-of-quarter portfolio report, a fund manager would choose to sell this stock despite a heavy loss.
Similarly, a fund manager could window dress the portfolio by buying best-performing stocks.
A manager could buy shares of PHILEX MINING CORPORATION (Stock Code: PX) — a mining stock that has risen by 43% during the 3rd quarter alone — only at the last minute, in time for the third quarter reporting. Although the stock is now part of the holdings, the portfolio reaped no benefit from it because the stock has already rallied prior to the purchase. At the start of the next quarter, this could even translate to a loss if the price of the stock fell.
Reference: Investopedia
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