Funds Cleaning House

It's time to talk about window dressing -- and I don't mean curtains. In the financial world, window dressing is what many mutual fund managers engage in as they prepare to close their books at the end of the quarter or year. The issue is that funds reveal their holdings only occasionally throughout the year, such as at the ends of quarters. And they don't want shareholders or potential shareholders gasping or cringing at any ugly names there.

So if a stock has cratered during the past few months, and it has been a major holding of a given mutual fund, the manager might move to sell out of the stock before the end of the quarter so that it won't appear on the list. (Note that the effect of the stock's fall is not so easily erased -- it will inevitably depress the fund's performance to some degree.)

For instance, there are plenty of stocks that have both fallen sharply and have been unable to make any major recovery from their 52-week lows. Here are some of them, along with their CAPS ratings:

These are the kinds of companies that funds might choose to sell out of.

What to do
So, what should you do about this? Well, know that if funds are unloading shares of these companies, their prices will likely fall further. Know that some of them are probably bargains now, and may become more so in the month ahead. Know also that when funds sell, they won't always unload all of their shares at once. When you own hundreds of thousands or millions of shares of something, you tend to sell in installments, lest you send the stock spiraling downward. It's the same when big buyers buy -- they do so over time, to avoid driving up the price more than they have to.

Not all funds engage in window dressing. Some good ones buy with conviction and hold on, waiting for reward. To find some outstanding mutual funds, I invite you to give our Motley Fool Champion Funds newsletter a whirl.