Window dressing in mutual fund portfolios: fact or fiction?
| Date | 03 May 2013 |
| Published date | 03 May 2013 |
| Pages | 136-149 |
| DOI | https://doi.org/10.1108/13581981311315550 |
| Author | Seung Hee Choi,Maneesh Chhabria |
| Subject Matter | Accounting & finance |
Window dressing in mutual fund
portfolios: fact or fiction?
Seung Hee Choi
Department of Finance and International Business, School of Business,
The College of New Jersey, Ewing, New Jersey, USA, and
Maneesh Chhabria
The Bank of New York Mellon, New York, New York, USA
Abstract
Purpose – Congress and the Securities and Exchange Commission (SEC) have mandated mutual
fund disclosure regimes to help investors make better investment decisions to strike an optimal
balance between the investors’ interest in more timely and accurate portfolio holdings disclosure and
the cost associated with making and disclosing the holdings information available to investors. Many
academics and practitioners point out that, despite all the regulations on portfolio disclosure, fund
managers can still engage in practices that go against the spirit of the rules without violating the letter
of the law. The purpose of this paper is to address the empirical question of whether the practice exists,
using holdings data for more than 3,000 equity mutual funds during the time period from 1995 to 2004.
Design/methodology/approach – In this paper, the authors examine window dressing by mutual
fund portfolio managers, using holdings data covering more than 3,000 equity mutual fundsfrom 1995
to 2004. The authors first investigate whether the fund holdings are materially different from universe
holdings across performance quintiles based on holdings in the month of disclosure and in the
following month. The second part of the analysis examines funds’ patterns of buying and selling.
Finally, the measure of “Buying Intensity” and “Selling Intensity” is examined, with a specific focus on
the holdings data for the fourth quarter.
Findings – An examination of fund holdings finds no statistically significant evidence of systematic
window dressing, either at the aggregate level or within subsamples of funds based on size or past
performance. Rather, it was found that fund managers tend to chase momentum. A combination of
investor sophistication and market oversight may serve to be effective in dissuading fund managers
from engaging in the practice.
Originality/value – The authors’ data are at the individual fund level, based on equity mutual funds
holdings data provided to Morningstar on a quarterly or monthly basis (according to Elton et al., the
Morningstar database provides timely and accurate mutual fund holdings information). These data
allow us to infer better the investment manager intent vis-a
`-vis using 13F data, which is aggregate
data across various fund families and separate accounts, or aggregate pension fund equity holdings
data that includes aggregate holdings of multiple portfolio managers. In addition, the authors
comment on the significance of the regulatory checks and balances that are designed to restrict fund
managers’ ability to window-dress their portfolios. In summary, the combination of quantitative
evidence from empirical tests and an examination of the legal framework under which mutual fund
portfolio managers operate, lead to the conclusion that window dressing is not prevalent in the
industry.
Keywords United Statesof America, Fund management, Disclosure,Mutual funds, Window dressing,
Portfolio disclosure, Fund performance
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JEL classification – G1, G2, G28
The views expressed in this paper are the authors’ and are in no way representative of the
views of either Urdang Securities Management or Bank of New York Mellon.
Journal of Financial Regulation and
Compliance
Vol. 21 No. 2, 2013
pp. 136-149
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981311315550
JFRC
21,2
136
To continue reading
Request your trial