Window dressing is the name given to a whole custom of institutional investors, and particularly of mutual fund managers, that is commonly adopted to ensure that their quarterly reports to investors gift an artificially clear aspect about the investments they have brought into their portfolio.
This window dressing is achieved straight through the culling at quarter end of particularly poorly performing stocks. Such stocks, generally regarded as "losers" owing to their modern price performance, are supplanted with stocks that have been among the top performers of modern times. This custom is designed to maintain marketing efforts that seek to encourage new investors to spend in the fund. Window dressing has the result of production it appear that the fund boss has been smart enough to spend largely or exclusively in the winners he/she now lists as production up the portfolio.
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As a marketing tactic the custom makes excellent sense. Possible investors will check out the fund's current positions and will in their mind register that the fund boss appears to have been consistently victorious in selecting stronger-performing stocks.
However from the point of view of maximizing investment returns, window dressing is counter-productive as it brings the fund boss into a excellent "buy high, sell low" scenario, especially as the investments made for window dressing purposes are mostly reversed after the quarter end reporting duration has passed. The custom is so widespread, however, that at each quarter end there is a resulting clear tendency for losing stocks to be pushed further downwards as big institutions exit their positions en masse.
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Meanwhile, those stocks that have already been on a tear will find themselves pushed even higher as fund managers engaged in window dressing seek to include these success stories in their portfolio. For the contrarian investor/trader as a result, each quarter end offers a great opening to buy some already beaten down stocks at an even cheaper price and then watch them recover as the window dressing pressure subsides and reverses.
Window Dressing - A Technique Used by Mutual Funds to improve execution Perceptions
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