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Window dressing in mutual fund portfolios: fact or fiction?


  • Seung Hee Choi
  • Maneesh Chhabria


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 funds from 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

Suggested Citation

  • Seung Hee Choi & Maneesh Chhabria, 2013. "Window dressing in mutual fund portfolios: fact or fiction?," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 21(2), pages 136-149, May.
  • Handle: RePEc:eme:jfrcpp:v:21:y:2013:i:2:p:136-149

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