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Fund 'Window-dressing'
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November 13, 1998: 11:18 a.m. ET
Some managers unload losers or buy winners to look good to investors
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NEW YORK (CNNfn) - A fund manager might be famous for picking the best stocks on Wall Street, but if he's got a couple of dogs in the portfolio investors might never know about it.
All the manager has to do is dump the losers before Dec. 31 and they won't be on the year-end financial statement. Presto -- problem solved.
The practice, known as "window dressing," is a way for fund managers and money managers to save themselves some embarrassment and keep investors happy.
"The object is to look good," said Sheldon Jacobs, editor of the newsletter No-Load Fund Investor.
Why hide the facts?
With thousands of mutual funds to choose from and a market that's recovering from a major downturn, managers face tremendous competition, analysts said.
"There is a lot of pressure on managers in general to look good," said Bruce Veaco, a portfolio manager at Clipper Fund in Beverly Hills, Calif.
If a fund is holding a lot of cash and the market has a great run-up, a manager might buy stocks at the end of a quarter so investors won't think they missed out on the rally.
A fund might buy big-names like GM and AT&T in late December and then sell the shares in early January, said Frank Cappiello, a money manager and president of McCullough, Andrew & Cappiello in Lutherville, Md.
"It's got to be a big stock that you can move a lot of money in and out of, because you want to sell it right away," Cappiello said.
Sometimes, a manager of a fund with a specific strategy will window dress if he missed out on an important stock. For example, if a tech fund manager missed a chance to buy Dell Computer Corp. (DELL), which rose 250 percent in 1998, he might be tempted to buy shares in December.
"You may have missed the whole rally, but investors don't know you bought it three days before," Jacobs said.
Other experts think the most likely type of window dressing is when managers get rid of losers on their books.
"I would look for signs of selling the year's debacles," said Russ Kinnel, head of equity fund research at Morningstar, a Chicago-based mutual fund tracker.
For example, a fund might not want to hold marketing firm Cendant Corp., whose shares plummeted after an audit showed former executives faked $500 million in revenues.
Hard to track
But it's hard to get a handle on how common it is for managers to window dress.
The U.S. Securities and Exchange Commission requires funds to report their holdings twice a year. For funds that operate on a calendar year the dates are June 30 and Dec. 31. Some funds report their holdings quarterly or monthly. But managers don't have to say when they buy and sell stocks. The SEC considers that information competitive.
"Window dressing is about as clear as mud," said Steven Reid, portfolio manager at the Oakmark Small Cap Fund in Chicago. "Nobody will admit to it."
While Reid said he doesn't window dress, he has benefited from it. He recalled a case in 1996 when shares of Texas Regional Bancshares (TRBS) jumped three points in the last hours of trading on June 30. He suspected it was managers who were window dressing, so he sold his fund's holding of the stock and made a tidy profit. It wasn't long afterwards that the price dropped back.
But investors aren't so lucky as to profit from window dressing. In fact, they pay higher transaction fees and commissions.
By some industry estimates, a stock transaction in a large mutual fund costs 4 to 6 cents a share.
"All window dressing does is create transaction costs…It takes (net asset value) out of shareholders' wallets and gives it to the brokers," said Jeff Molitor, principal and director of portfolio review at Vanguard Funds. "If we ever caught anyone doing window dressing, we'd read them the riot act."
What investors can do
If you think a manager is window dressing, you should compare the fund with others in the same category, said Michael Fasciano, manager of the Fasciano Fund in Chicago.
If your fund owns the same winners as other funds but its returns are lagging behind, you should be suspicious.
"What makes you look good is the actual performance, not the stocks you own," Fasciano said.
Some fund companies make it easier to track stock purchases and sales. Fidelity Investments, for example, publishes the top 10 holdings for all of its funds every month, Morningstar's Kinnel said. Fund companies report their holdings quarterly, and sometimes monthly, to Morningstar.
While it's most obvious at the end of the year, you can spot signs of window dressing --increased trading volume -- before the end of quarters.
Experts said it's unlikely an individual investor can try to capitalize on window dressing by buying stocks during a big sell-off.
But you can watch to see what stocks funds are buying from quarter to quarter and follow their lead, Cappiello said.
For example, Cappiello bought shares of Brinker International (EAT) after he noticed a few funds investing in the company. In the next quarter, the shares went from 18 to 26.
"That's the technique to use -- but that's not really window dressing," Cappiello said. "That's just watching the big boys. Window dressing doesn't help the investor very much. All it does is cost them money."
-- by staff writer Martine Costello
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