Assessment of window dressing using fund returns and portfolio holdings

Abstract

This paper presents the analysis of the monthly portfolio holdings and daily returns of a large sample of Spanish domestic equity funds to test the potential manipulation of portfolios in mandatory reports. The comparison between the return of the fund portfolio holdings and the observed fund return reveals that only a low percentage of filings may be classified as window-dressed portfolios. These portfolios are dispersed across funds and fund managers, but they are clustered over three specific quarters that coincide with bear market months. The results seem to indicate that although window dressing is not a widespread practice in the Spanish market, there is evidence to suggest that mutual funds employ this trading strategy as a response to poor past performance.