Dilbert On Mutual Funds

Nuff said.

Window Dressing and Other Mutual Fund Games

What do the following terms have in common?

• Window Dressing
• Painting The Tape/Banging The Close
  
• Comparison Shopping
  

The answer is that they're all games that mutual fund managers play at the end of the year to make their portfolios' performance look better. The Investing section of today's Wall Street Journal has a short piece that describes these games:

• Window dressing happens when the portfolio manager sells off securities just before the end of the reporting period so that they don't show up in the annual (or quarterly) listing o the portfolio's securities.
• Painting the Tape (also called Banging the Close) occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
  
• Comparison Shopping could also be called "benchmark shopping". This refers to the idea that if a fund manager can't beat his benchmark, he just switches to a new benchmark that he can beat.

Read the whole thing here.

More On Fundamental Indexing

In doing a bit of preparation for this week's classes (it's mutual fund week in my investments class) I came across a resource called The Journal of Indexes - put out by Indexuniverse.com. It has a wealth of information on indexing and index funds, and is well worth a look see.

To whet your appetite, here's a piece from the journal on "fundamental indexing", which I've blogged about before (i.e. here, and here). In case you're unfamiliar with the term, a "fundamental" index is one where the individual stocks in the index are weighted based on some "fundamental" factor, like cash flow, dividends, revenue, or profits. So in one sense, they're the close relatives to market capitalization-weighted (instead of weighting by market cap, they weight by dividends, sales profits, etc...). Proponents of fundamental indexing claim that cap-weighted indexes over-represent companies that have grown rapidly and are therefore likely to be overvalued. So, their reasoning for "fundamental" indexing is that it corrects some of this supposed mis-weighting.

The article, titled "Fundamental Indexing Smackdown", consists of discussions between two proponents of fundamental indexes (Rob Arnott and Jeremy Siegel) and one sceptic and promoter of traditional mcap-weighted indexes (Gus Sauter).

The three commenters are among the biggest dogs in the indexing pack, so the article is (not surprisingly) a pretty good one. Enjoy.