re: QCOM example in Portfolio Pumping
>> SEC Probes End-Of-Quarter Portfolio Moves
January 19, 2001
Cal Mankowski
Reuters
Investment managers who like to tweak their portfolios at the end of every quarter with questionable strategies have been served notice that someone is looking over their shoulder.
Much talked about on Wall Street, sharp moves in individual stocks at quarter-end are often attributed to "portfolio pumping" or "window dressing."
Managers may dress up their portfolios by getting rid of some big losers just before quarter-end so the stocks will not appear in the lists of holdings sent out to clients. Conversely, they may buy some stocks that have been spectacular winners to give the impression that they were stock-picking geniuses.
In portfolio pumping, managers buy additional quantities of stocks already in their portfolio, hoping the activity will boost the price of the security and make their performance look better. Portfolio pumping usually works best with smaller or otherwise illiquid stocks.
As for window dressing, "the problem is what is behind the manager's intent in doing that," Paul Roye, director of the division of investment management at the Securities and Exchange Commission (SEC) said in a telephone interview. If the intent goes beyond just buying a good stock, the manager may be breaking the law. "The problem is trying to find the right case to prove it," Roye added.
PROBE EYES SOME SPECIFIC CASES
The SEC has found some situations that merit taking a closer look, Roye said, without mentioning any names. The commission is now in the process of identifying funds that have had an increase in the net asset value (NAV) on the last day of the quarter going back several quarters.
Roye noted that the SEC has also been telling the independent directors of mutual funds that they should be on the lookout, too. But as Roye and others in the fund industry have said, proving intent is not easy.
"I do think that there is a natural tendency for fund managers to want to eliminate embarrassing investments that have have gone down significantly from the purchase price," said Bob Bissell, president of Wells Capital Management. "I would argue that it's just simply taking a loss and moving on and it's the nature of the business. If you get two right and one wrong that's not a bad batting average."
Mercer Bullard, a former SEC attorney who now heads a shareholder activist group called Fund Democracy, recalls that at the end of 1999 many fund managers started buying QUALCOMM Inc. (QCOM) after the stock had made a spectacular 2000 percent run. It may have looked good to see it in the portfolio, but fund shareholders were getting it at a peak price.
WINDOW DRESSING HARD TO PROVE
"Window dressing is a hard thing to nail down," said David Musto, assistant professor of finance at the Wharton School of the University of Pennsylvania. "It's hard to see a footprint to that."
But Musto and a group of researchers discovered in a study of fund prices that returns indeed look better at the end of a quarter and not so good just a day later. He said the data are consistent with a marking-up strategy.
"If prices are inflated at mutual funds that can be a problem because people buying in on those days are paying too much," he said. But he added that the mutual funds could be inadvertent beneficiaries of end-of-quarter buying by other parties.
"It's certainly possible that the net asset value (NAV) price is not necessarily conclusive evidence that the mutual fund is responsible for the bump-up in price of the underlying security," said Lori Richards, director of the SEC's office of compliance, inspections and examinations.
"We have decided to take a more systematic and focused and deeper look at the phenomenon on a quarterly basis," Richards said in a telephone interview. Richards said that the SEC has been encouraged by the outcome of a case brought last year by regulators in Canada. RT Capital, part of Royal Bank of Canada (RY), paid $2 million in a settlement of the case.
A fund industry spokesman said the SEC review is welcome. "The SEC should be patrolling and they're doing just that, so we strongly support a very vigilant action on this," said John Collins of the Investment Company Institute (ICI). <<
- Eric - |
