Stock exchange traded funds have rallied into the end of the third quarter on renewed hopes Europe will get its financial house in order.
However, some of the gains may also be fueled by the time-honored tradition of “window dressing” at mutual funds just before the quarter ends.
According to an Investopedia definition, window dressing is “a strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance.”
A fund manager may sell underperforming holdings and load up on highfliers in an effort to boost quarterly returns before mailing out statements to shareholders. Some managers are known to even stray outside the fund’s stated objective before quarter-end.
J.S. Kim for Seeking Alpha points out that window dressing only leads to inefficient markets. Noticeable losers start drifting lower for no apparent reason other than fund managers wanting to dump losing stocks and hide that fact from clients, Kim noted. On the other hand, robust performers will suddenly do even better as managers pile in.