Window Dressing in Bond Mutual Funds

Abstract

We examine portfolio credit quality holding and daily return patterns in a large sample of bond mutual funds and document evidence of window dressing. Using portfolio credit quality holdings data, we find that bond funds on average hold significantly more government bonds during disclosure than nondisclosure, presumably to present a safer portfolio to shareholders. Multiple-index market models estimated with daily returns data corroborate these findings. We detect differences in factor loadings on days surrounding disclosure dates that indicate systematic tilting of the portfolio toward higher quality instruments. 2006 The Southern Finance Association and the Southwestern Finance Association.

Do Families Matter in Institutional Money Management Industry: The Case of New Portfolio Openings

“…For example, portfolio level data is not readily available in the mutual fund industry, where holdings are revealed just twice a year. As a result evidence consistent with window dressing is observed at the portfolio level in the mutual fund industry (Musto 1997, O'Neal 01, andMorey andO'Neal 2002).…”

“…O'Neal estimates that total costs from window dressing activities may amount to $1 billion annually for U.S. equity managers. Morey and O'Neal (2002) examine credit quality holdings data in a sample of U.S. bond portfolios. Consistent with the window dressing hypothesis, they find that portfolios in their sample hold significantly more government bonds during disclosure to present safer portfolios to investors 5 .…”

Measuring the usefulness of information publication time to proxy for returns

“…This is of importance when making a distinction between institutional investors and non-institutional investors as indicated in previous research [Lakonishok et al 1991;Musto 1999], which related increased price reactions around calendar quarter-ends with the incentives of institutional investors to window dress (to improve the appearance of the portfolio performance before presenting it, the manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter). Such actions are also documented in post-EDGAR research [Carhart et al 2002;Morey and O'Neal 2006].…”

The Limited Partnership Model in Private Equity: Deal Returns over a Fund's Life

“…Because non-performance-related management fees were kept nearly stable over time while fund sizes have steadily grown, the relative shares of these fees in fund managers' total compensation have become increasingly high, leaving investors to wonder whether PE firms are still incentivized to create decent returns actual window dressing behavior. The literature covers different asset classes, most often equity and bond mutual funds (Lakonishok et al, 1991;Morey and O'Neal, 2006;Musto, 1997). (Metrick and Yasuda, 2010).…”