In the second quarter, 80% of all mutual funds lagged the S&P 500 on average, yet miraculously, on June 30, 12 of the 13
Magic? Or possibly portfolio pumping? Thats the question a CBSMarketWatch columnist asks, astounded that fund managers would resort to such illegal tactics on the heels of the fund trading scandal and Eliot Spitzers wrath over the past 10 months. By portfolio pumping, also known as marking the close, portfolio managers drive up the value of their holdings by making big purchases of the shares, typically on the last day of the quarter. And by propelling the performance of the fund, which is quoted from the last trading day of each quarter, funds can attract new assets.
As further proof of the possibility of portfolio pumping, CBSMarketWatch cites an academic study showing increased trading volatility on the last day of each quarter.
To outwit fund managers at their own game, CBSMarketWatch suggests that investors avoid purchasing funds at inflated prices on the last day of the quarter. Avoiding these days can improve performance by as much as 4%, according to a study published in the Journal of Finance.