‘Window dressing’ a hint of bigger problem

Commentary: Fund managers mask performance for a reason

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 Dec. 6, 2012, 2:30 p.m. EST

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By MarketWatch

SAN FRANCISCO (MarketWatch) — “Window dressing,” the practice of bidding up stocks at the end of the month when performance numbers are tabulated, obviously is a problem for investors who depend on results to make informed decisions.

But the deeper problem is what those managers are trying to hide: lackluster results.

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Fund managers lift results with ‘window dressing’

A WSJ analysis found unusual numbers of stocks beating the market on the last day of most quarters, suggesting deliberate efforts to temporarily drive up their value. Jason Zweig reports on Markets Hub. Photo: AP.

A sweeping investigation by The Wall Street Journal found that fund managers regularly bid up stocks they held in the last trading day before the end of the month. It’s disturbing for those who trust that the U.S. equities markets are the most fair and transparent in the world, but as the story notes, many of these moves are perfectly legal. See full story on end-of-the-quarter stock manipulation .

Moreover, while the eye is drawn to the popping prices on stocks during the last day of the quarter, it’s the intervening days that are most troubling.

Those mutual funds charging you front-end, back-end, 12b-1 and other fees? They can’t even beat the market.

In most studies, fewer than 20% of funds beat the indexes they aim to. In 2011, just 16% of stock funds met or exceeded the returns of the indexes they tracked, according to S&P Indices.

Reuters

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Morningstar, which is supported by the industry, puts the percentage of successful U.S. equity funds higher, 55%. That’s defined as a fund that matches, or outperforms the relative index.

Even if you accept Morningstar’s success rate, consider that the performance numbers are skewed by window dressing. In other words, many of those funds may actually be lagging their indexes on all but on last trading day of the month.

As bad as window dressing may be, the real eyesore is the idea that managed portfolios can claim to beat the market.

— David Weidner