It’s the time of year again when money managers start window dressing—dressing up their investment portfolios to make them look as good as possible to investors, according to the Wall Street Journal.  

When investors receive their reports after each quarter, firms usually list their top holdings to provide a sense of what stocks they own. Around this time of year, money managers from mutual funds to hedge funds spend this time selling off picks that performed poorly in the pervious 11 weeks or so and buying up the quarter’s best performers.

Some money managers also buy more shares of their biggest winners, which can drive the price to boost returns, at least temporarily.

Window dressing does see success. In the past 16 years, the Standard & Poor’s 500 best performing stocks of the first 11 weeks or so of the fourth quarter have beaten the overall index by an average 2.6 percentage points in that final week, according to a research report by Thomson Financial. The stocks have beaten the market in each of those 16 years.

However, it may be tough for smaller firms to tag along. The study suggests the efficacy comes from buying all the 50 best performers--picking up just a handful of top performers might not work--and selling before the first trading day of the year.

The practice is particularly common among managers of tax-exempt investment funds, whose investors aren’t taxed on capital gains, says Thomas Russo, portfolio manager at Lancaster, Pa.-based Gardner Russo & Gardner. Such managers can sell all the stocks in their portfolios and replace them with news ones by year end without incurring taxes.

 The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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