Mutual Fund Window Dressing?

[frujinator]

I found this article, and kind of freaked out about my funds.

http://lcb.uoregon.edu/departments/finl/conference/papers/schaumberg.pdf


Any thoughts?

 

[brewer12345]

Happens al the time in the fund industry. It is one of the reasons I do not like actively managed funds, on the whole. Note that this is a non-issue with index funds, by and large.

 

[maddythebeagle]

I learned about this stuff in the early days of the fool.com. Now they are suggesting some active funds

 

[justin]

The crux of the article:

15% of funds "window dress". They are mostly growth funds with high turnover and those with managers experiencing recent poor performance.

One of my big screens for actively managed mutual funds (after expenses) is portfolio turnover. High portfolio turnover is a red flag for me unless there is some legitimate explanation (change in style or target index, etc).

 

[riskadverse]

While I understand that window dressing may not do the funds who practice it any good, is there a way I could identify the candidates and use it to front run the stocks they buy?

 

[audreyh1]

The crux of the article:

15% of funds "window dress".  They are mostly growth funds with high turnover and those with managers experiencing recent poor performance. 

One of my big screens for actively managed mutual funds (after expenses) is portfolio turnover.  High portfolio turnover is a red flag for me unless there is some legitimate explanation (change in style or target index, etc).

Justin's got it right! A good way to avoid those funds is to avoid funds with high turnover.

Audrey

 

[unclemick]

Ahem!

We born again Bogleheads have long ago been blessed with the mantra of high turnover.

The prime reason I dumped my VG Small Cap Value Index. Even an index sliced too thin can exhibit some nasty characteristics. Unfortunately popularity of a given asset class can mask the effect - for long time until the flow reverses to the ebb.

Heh heh heh

 

[frujinator]

I guess Window Dressing is sort of like cheating on your taxes and sex:

EVERYBODY DOES IT!

 

[cute fuzzy bunny]

While I understand that window dressing may not do the funds who practice it any good, is there a way I could identify the candidates and use it to front run the stocks they buy?

Not really. The 'window dressing' is usually buying stocks that have gone up, but after they've done so. So you look at your window dressed fund and see lots of stocks that have done well. While they have to tell you whats in the fund, they dont have to tell you they bought it pre or post run-up.

 

[audreyh1]

I guess Window Dressing is sort of like cheating on your taxes and sex:

EVERYBODY DOES IT!

Not really. There are fund families which pride themselves on their conservative approach (and low turnover). Vanguard, Dodge and Cox, Davis Funds, Longleaf, etc., etc. In some of these fund families the company owners have a lot of their own money in the funds. If you study mutual funds for a while you'll be able to figure out which companies are reputable and do right by their shareholders and which are chasing performance and trying to look like "high fliers".

Window dressing was rampant in 1999/2000. It's usually the "hot sector" funds that abuse it. The funds where "everyone wants in".

Audrey

 

[justin]

The inverse of turnover is average holding period. A 33% turnover equals a 3 yr average holding period. 50% = 2 yr avg holding period. 100% = 1 yr avg holding period. At some point, the fund managers switch from "investors" to speculators.

Window dressers will get caught when their turnover rate jumps up.