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Don't Let This Mutual Fund Move Trick You

By Dan Caplinger - Dec 15, 2013 at 1:45PM

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A popular strategy that mutual funds follow can mislead investors into thinking managers are smarter than they actually are. Find out how they do it here.

In a strong bull market in 2013, most mutual funds have performed fairly well. But as the end of the year approaches, some mutual funds resort to a sneaky trick to try to convince investors that their managers made smart moves that they actually missed out on.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the practice of window dressing, by which mutual funds buy winning stocks right before the end of a quarter so that the stocks will show up on their quarterly holdings report. Dan explains that fund managers don't want to look like they missed out on big gains, so the temptation to buy winners puts a lot of pressure on them. Dan observes that this quarter, Amazon.com (AMZN 2.07%) and FedEx (FDX 0.63%) are likely candidates for managers to use for window dressing, along with Valero Energy (VLO 0.96%) and Micron Technology (MU 4.37%). Dan goes through the reasons why Amazon, FedEx, Valero, and Micron have done so well, but points out that if funds haven't actually generated strong returns, investors should be suspicious and check to see just how long the fund has owned those holdings.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and FedEx and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.55 (2.07%) $2.91
Valero Energy Corporation Stock Quote
Valero Energy Corporation
VLO
$115.19 (0.96%) $1.10
FedEx Corporation Stock Quote
FedEx Corporation
FDX
$230.68 (0.63%) $1.44
Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
MU
$65.04 (4.37%) $2.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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