Year End Portfolio Window Dressing

December values may not be what they seem

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at

As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of year-end Stock Market activity. On Wall Street, investing can be a minefield for those who don’t appreciate the non-economic, non-business-model, factors contributing to the market value numbers in fourth quarter brokerage account summaries.

Year end market values may not be what they seem….

“Portfolio Window Dressing” (PWD) produces security pricing that is more a function of next year’s institutional marketing programs than a reflection of the economic forces that we would like to think are their primary determining factors. Not even close…

Toward the end of every calendar quarter, we hear the financial media report that “institutional PWD activities” are in full swing. But that is as deep as the stories ever go. What are they talking about, and just what does it mean to you as an investor? Note that, to a lesser extent, particularly toward year end, individuals do some PWD of their own…

Swapping ‘losers’ with ‘best-performers’

There are at least three forms of PWD, none of which will make you feel good about your Wall Street relationships, or the tax code.

The best known variety involves the wanton selling of portfolio “losers” and replacing them with the year’s “best performers” This practice makes fund managers look smarter on year-end holdings reports sent to major clients, and may make fund performance numbers appear more attractive to prospective “fund switchers”.

This practice forces prices within the weakest performing sectors to fall even further while artificially raising the market values of the big winners. Business economics are just not an issue. Obviously, all fund managements will take part in the ritual if they choose to survive.

PWD is neither investing nor speculating, yet no one seems to care about the ethics, legality, or “Buy High, Sell Low” trading being done with your money. This is precisely what is happening now to income Closed End Funds and a basket of outstanding companies that have not participated in this year’s record surge. Some managers have probably mixed equities into their income allocation buckets…

A more subtle form of PWD takes place throughout the calendar quarter, but is “unwound” before the Quarterly Report data reaches the printer. In this less prevalent (more fraudulent) variety, managers invest in securities that are out of sync with the fund’s published investment policy during a time when their particular specialty has fallen from grace with the gurus.

Adding commodity ETFs, or popular emerging market issues to a Large Cap Value Fund, for example, may improve performance but at greater risk than unit holders had bargained for. The inappropriate securities are replaced before the fund’s holdings report is prepared, hopefully enhancing results.

A third form of PWD is referred to as “survivorship bias”. Here, poor performing funds are merged into other family members, making the fund family sport much better statistics than it would otherwise. “All of our funds beat the S & P”… uh huh!

Business as usual?

Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem more concerned with politics and marketing than they are with investing

I cannot understand why the media reports so superficially on these “business as usual” practices. Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem more concerned with politics and marketing than they are with investing.

They are trying to impress their major clients with their brilliance by reporting ownership of all the hot tickets and none of the major losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They have made “Buy High, Sell Low” the accepted investment strategy of the Mutual Fund industry.

Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the wrong direction.

Analytically, the quarterly anomaly of artificial demand for some investments, and unwarranted weakness in others, throws almost any individual security or market sector statistic totally out of whack with the underlying company and sector fundamentals.

But the performance numbers get even fuzzier, and not in lovable way, when you throw in the added impact of the ever-growing list of index ETFs. I don’t think I’m alone in thinking that the real meaning of security prices has less and less to do with corporate fundamentals than it does with the morning line on popular ETF ponies… the dot-coms of the new millennium. (Does anyone remember the “Circle of Gold” chain letter from the seventies? Isn’t GLD, or IAU, about the same thing?)

Self-inflicted tax code

And then there’s the (self-inflicted) tax code variety of PWD… investor’s rushing around taking losses on perfectly good investments to avoid paying capital gains taxes. Instead, spend your savings to support tax code replacement surgery.

You absolutely need to consider the impact of tax code motivated transactions during the always-entertaining final quarter of the year. One would never suspect (what with millions of taxpayers gleefully losing billions of dollars every year) that the purpose of investing is to make money. The net impact of “year end tax saving strategies” is pretty much the same as that of the Type One PWD described above.

But here’s an off-quarter investment recipe that you really should consider. Get out there and buy the November/December 52-week lows in IGVSI equities and strong-distribution-history income CEFs; wait for the periodic and mysterious “January Effect” to be reported by the media with their eyes-wide-shut amazement; pocket some easy short-term (the most hated variety) profits.

Don’t want to pay taxes on the profits? Send them to me. I understand that anything after taxes is better than nothing at all.

All of these PWD issues raise an important question. Is there a method to actually decipher the true value of a share of common stock when market price is actually a function of company fundamentals, artificial demand for index derivatives, various forms of PWD, and tax code hysteria?

This is an unfortunate (possibly permanent) condition that can be used to great financial advantage. With security prices less closely related to fundamentals such as dividends, projected profits, and unfunded pension liabilities and more closely related to MPT hocus-pocus and artificial demand factors, the only (sensible) operational alternative appears to be trading.

Buy downtrodden Investment Grade Value Stocks and take your profits on those that have risen to predetermined (reasonable) targets… and try to get it done before the big players do. But wait, isn’t that the success recipe used in Market Cycle Investment Management, Working Capital Model, portfolios?

Just call me old fashioned, but I miss the days when there were just stocks and bonds… interesting place Wall Street.