Portfolios in disguise? Window dressing in bond fund holdings

Ortiz, Cristina; Sarto, José Luis; Vicente, Luis

doi:10.1016/j.jbankfin.2011.07.017

Cited by 18 publications

(9 citation statements)

References 36 publications

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“…Based on this methodology, these funds intuitively present evidence of window dressing. This intuition is based on the decision of the portfolio manager who, when observing winner and loser securities in the reporting period, leans towards winner securities to give the false impression of a greater selection ability (Agarwal et al 2014 The results of this research corroborate the findings of Bremer and Kato (1996), O'Neal (2001), Ng and Wang (2004), and Ortiz et al (2012) for the Brazilian market. In addition, the separation presented for size, history of returns, and tracking error was shown to be relevant for Brazil, according to the studies by Brown et al (1996), Chevalier and Ellison (1997), Sirri and Tufano (1998), Cremers and Petajisto (2009), and Huang et al (2011) for other markets.…”

Section: Backward Holding Return Gap (Bhrg)supporting

confidence: 73%

“…The authors found strong evidence that winner stocks are traded more than loser ones in the reporting month, suggesting the presence of window dressing practices aiming to buy winner stocks and disclose them in the portfolio. Ortiz et al (2012) studied 865 debt investment funds in the period from June of 1999 to December of 2006 in the Spanish market. The analysis period provided a sample of 35,171 monthly portfolios grouped by the authors into (i) short-term funds, whose portfolios presented a duration measure of up to two years and (ii) long-term funds, whose portfolios presented a duration measure of more than two years.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

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Window dressing in Brazilian investment funds

Marques

Sampaio

Silva

2020

Rev. contab. finanç.

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This paper investigates the presence of window dressing in the Brazilian investment fund market, focusing on equity funds. Window dressing is a practice that presents a particular portfolio composition to the market, which is different from that held by the fund in the reporting period. Just before the end of the period, fund managers change their positions with the aim of presenting safer, more profitable securities portfolios. We believe that there is a lack of empirical evidence on this topic in Brazil. Previous research focuses on diversification, style analysis, fund portfolio turnover, manager profile, and performance. Therefore, we believe that our paper is pioneering in presenting results on window dressing in Brazil. With the presence of window dressing, the market may signal distorted results to investors and guide their allocations towards funds in which they would not invest in the absence of such practices. Moreover, the adoption of window dressing may increase transaction costs and thus destroy value. Our results present a connection with previous studies by Bremer and Kato (1996), O’Neal (2001), Ng and Wang (2004), Ortiz, Sarto, and Vicente (2012), and Agarwal, Gay, and Ling (2014). This paper provides evidence of window dressing in Brazilian equity funds and proposes an empirical study to verify the presence of the practice between 2010 and 2016, using market model residuals, rank gap, and backward holding return gap analysis techniques. In short, our results are consistent with window dressing practices in funds managed by small companies that were losers against the Bovespa Index and presented a high tracking error in the period.

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Section: Backward Holding Return Gap (Bhrg)supporting

confidence: 73%

Section: Theoretical Frameworkmentioning

confidence: 99%

Window dressing in Brazilian investment funds

Marques

Sampaio

Silva

2020

Rev. contab. finanç.

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“…In contrast, at the beginning of the year, highly visible stocks have low returns that adjust up as institutional investors adjust toward these stocks after achieving targeted returns. A large body of research provides evidence consistent with the seasonal impact of fund manager behavior on both stock and bond returns (e.g., (Ng and Wang 2004;Morey and O'Neal 2006;Ortiz et al 2012)). It has been twenty years since Ackert and Athanassakos (2000) first reported the seasonal pattern in returns for visible stocks.…”

Section: Literature Reviewmentioning

confidence: 92%

Gamesmanship and Seasonality in U.S. Stock Returns

Ackert¹,

Athanassakos

2021

JRFM

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We re-examined the seasonal pattern in the excess returns of highly visible American firms. In contrast to the seasonality for risky, less visible firms, we found that highly visible stocks display return seasonality that shows the opposite trend. Fund managers are prone to gamesmanship, putting downward pressure on prices for highly visible firms at the beginning of the year, which is reversed later with buying pressure. Due to the bonus culture, fund managers start the year by buying small, risky stocks in order to beat benchmarks. Once targets are met, they adjust toward visible, less risky stocks to lock in returns, providing them with a seasonal returns pattern opposite to that of small firms. A re-examination is warranted because the world has become increasingly globalized, and some argue that managers’ incentives are aligned with investors due to increased scrutiny. We used analyst following as a proxy for visibility and examined the seasonal pattern for 1997–2018. Though the anomaly was first reported twenty years ago, it persists in recent data. Rational investors may be limited in their ability to arbitrage mispricing because institutional investors who drive the market are self-interested. Future research may examine the seasonal pattern in countries with more stringent regulation of financial professionals or with high-frequency data.

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“…3. Some studies on the Spanish mutual fund industry examine WD (in equity and bond funds) and the January effect and confirm that investors react to portfolio holdings information in this market (see, for example, Ortiz et al, 2010Ortiz et al, , 2012Ortiz et al, , 2015. There are also studies that examine other research questions in the Spanish industry that show that investors use information based on disclosed portfolio holdings to assess managerial ability in conjunction with past performance (see, for example, Álvarez et al, 2014;Andreu et al, 2017).…”

Section: Orcid Idmentioning

confidence: 95%

Window dressing in the Active Share scores in publicly reported portfolios

Andreu

Forner

Sarto

2021

BRQ Business Research Quarterly

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Using a unique database that includes publicly disclosed fund holdings at the end of the quarter as well as the holdings in all non-publicly disclosed months, we found that some funds could alter their portfolios in publicly disclosed months to artificially increase their Active Share scores and consequently appear more active and take advantage of the positive relationship between Active Share and money flows. We show how, consistent with non-informed trades, these funds erode their future performance. However, these funds reach their objective of increasing future money flows. Moreover, we find that window-dresser funds can be identified by controlling the level of tracking error. The funds with high Active Share scores and low tracking errors have the highest levels of Active Share window dressing and the worst future returns. However, compared with less active funds, they are able to capture higher money flows. JEL CLASSIFICATION G23; G11

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Portfolios in disguise? Window dressing in bond fund holdings

Cited by 18 publications

References 36 publications

Window dressing in Brazilian investment funds

Window dressing in Brazilian investment funds

Gamesmanship and Seasonality in U.S. Stock Returns

Window dressing in the Active Share scores in publicly reported portfolios

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