Window dressing in mutual funds (Indonesia) - Introduction

8/9/2019 Window dressing in mutual funds (Indonesia) - Introduction

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The Existence of Window Dressing in Indonesia’s Stocks Mutual Fund and Its

Correlation to Fund’s Future Performance

! Calista El"ina #essl!n

$IM %&'%('&(

Cha)ter I

%*% Introduction

Investing in mutual fund has become more popular these days. Since mutual

funds are better diversified and professionally managed, it gains trust from the investors.

According to Indonesia Financial Services Authority, stocks mutual fund primarily

accounts for the incremental jump in mutual fund investment of 20.! trillion by the

second "uarter of 20#. Stocks mutual funds contributed about #2.$%& of the total

investment. 'he target for 20( is increase of flo) by (&.

In order to achieve a favorable portfolio and increase investors* flo) to the fund,

approaching the end of year, a phenomenon called +indo) ressing is fre"uently heard

in the ears of securities investors. It has been both globally and locally kno)n for years,

yet it is still unobservable because the investors are only able to access the report on acertain period.

'he term )indo) dressing itself is defined as a strategy used by mutual fund and

portfolio managers near the year or "uarter end to improve the appearance of the portfolio

or fund performance before presenting it to clients or shareholders. 'o )indo) dress, the

fund manager )ill sell stocks )ith large losses and purchase high flying stocks near the

end of the "uarter. 'hese securities are then reported as part of the fund-s holdings to

attract investors.

'his practice of altering and distorting portfolio has the potential to negatively

affect the fund value. Assumed that managers )ho engage in )indo) dressing do not

have the sufficient skills, incur high levels of trade costs, it is speculated that their future

performance should be averagely poor Agar)al, /ay, and ing 20#1. 'his assumption

is linked to a previous literature stating a positive association bet)een career concerns of



managers and their risktaking behavior 3horana %%$4 5ro)n, 6arlo), and Starks

%%$4 and 7hevalier and 8llison %%91. A manager )ho performs poorly might )ant to

take the risky bet of losing investors* flo) to )indo) dress their portfolio.

Since many investors evaluate funds based on a calendaryear basis, it provides a

greater potential for the managers to )indo) dress in ecember. 'he )indo) dressers

can also benefit from ta:loss selling and pool themselves to this occasion 5ro)n,

6arlo), and Starks %%$1. In Indonesia, the managers are obligated to disclose annual

financial report after audited by accountant in 5A;8;A< by the end of third month after

the last date of reporting.

If the stocks mutual fund managers purchase )inning stocks and sell the loser

stocks in big amount of money, the result of this act is the term )indo) dressing itself

might become an annual phenomenon in stock market in )hich the stock prices

potentially rise to)ards the year end report submission. 'he increase usually happens in

ecember, during the end of ecember to the early days of =anuary, or precisely the last

( days of ecember and the first 2 days after >e) ?ear. 'he price of =akarta 7omposite

Inde: al)ays rises for at least 2.#& from >ovember to ecember )ithin the past

decade. 'he highest jump )as on 200@ )ith 2.2& incremental increase. 8ven during

the crisis in 200!, the inde: increased from 2#.(# to @((.# for about %.9&.

%*( Pro+lem Formulation

An alleged annual phenomenon in the stocks mutual fund in Indonesia called

)indo) dressing, )hich is engaged by the fund managers in stocks mutual fund to

present a favorable report and portfolio to the clients or shareholders. 'he practice of this

term is unobservable by investors since the disclosure of report is only available on a

certain time. +indo) dressing is associated )ith unskilled managers in a poorly

performing fund during the "uarter. 'herefore, it is assumed that )indo) dressing is

associated )ith a lo)er future performance of the fund. 'he purchases of )inning stocks

by several funds in big amount of money potentially have an impact to the movement of

=akarta 7omposite Inde:. 8:planation above concludes research "uestions as follo)

. oes +indo) ressing in Stocks <utual Fund e:ist in IndonesiaB

2. Is +indo) ressing negatively related to funds* long term future performanceB



@. Is +indo) ressing negatively related to funds* short term future performanceB

#. oes +indo) ressing have a significant impact to the =akarta 7omposite Inde:B

%*, -esearch .+/ecti"e

a. Identify the e:istence of +indo) ressing in Stocks <utual Fund in Indonesia

b. Identify the correlation of +indo) ressing on fund*s short term performance.

c. Identify the correlation of +indo) ressing on fund*s long term future performance.

d. Identify the impact of +indo) ressing in =akarta 7omposite Inde:.

%*0 Sco)es and 1imitations

'his research e:amines the movement of 00 stocks mutual fund in Indonesia for

9 years from 200!20(. 'he data sampling )ill involve analyCing data on the beginning

of each "uarter to the end date of each "uarter for 9 years. 'he methodology limitations

of this research )ill gather data from "uarterly reported holding, annual reported holding,

fund fact sheet, and annual report.

%*2 Writing Structure

Chapter 1 Introduction

'his chapter portrays the rationale of this topic and e:plains the background information

of this research and follo)ed by statement of problem, research objective, research

"uestions, scopes and limitations, and )riting structure.

Chapter 2 Theoretical Foundation

'he chapter provides strands of literature )hich supports the evidence and lists previous

related researches to the topic.

Chapter 3 Methodology

etailed methodology to ans)er predefined problem )ill be e:plained in this chapter.

Chapter 4 Data Analysis

'his chapter )ill e:plain ho) the researcher processes the data to fulfill the research

objectives and ans)er the research "uestions.

Chapter 5 Conclusion



'his stage sho)s the correlation bet)een the results of the research )ith the research

objectives. It should also prove that the result of the research can ans)er the research

"uestion asked before. 'he author )ill also recommend future steps and improvement.

Window dressing in mutual funds (Indonesia) - Introduction

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