Jason Zweig has outlined in the Wall Street Journal's Intelligent Investor column how mutual fund managers can make a few shifty moves this time of year to make their funds look better than they might actually be.
"If history is any guide, a lot of portfolios may get a makeover between now and 4 p.m. on Dec. 31, when the 2008 trading year will finally take its last putrid breath," Mr. Zweig said in the column.
The first tactic is window dressing, where managers will often dump their dogs toward the end of the year and buy better-performing investments to give their funds the look of success.
Second, some managers partake in what is known as "painting the tape" - or buying the shares of stock they already own in the hope of driving up the price. This would boost the fund's returns, if only for the final moments of the calendar year, and inflate the fund company's assets.
"Painting the tape is a one-day wonder," Mr. Zweig said. "Historically, 80 per cent of all U.S. stock funds and 91 per cent of small-company funds have beaten the market on the last trading day of the year - and roughly two-thirds have given most of that gain right back on the first day of the following year."
Finally, there's the tactic of switching benchmark indexes. Mutual funds are required to compare their performance to an index, such as the S&P 500 or the S&P/TSX composite index. However, some funds will switch their benchmarks at the end of the year if a different benchmark will make their performance look better.
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