Derrick received his MBA from Lehigh University and is a
Martindale-Rauch Business Scholar. He received his certification in
Wealth Preservation and Asset Protection from the Wealth
Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to dhandwerk@1stallied.com.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC
Portfolio Window Dressing
When I typed in the phrase ‘portfolio window dressing’ into the
search engine I found many entries. I think
www.investopedia.com
had the best explanation.
Definition of 'Window Dressing’
A strategy used by
portfolio managers
near the year or quarter end to improve the appearance of the
portfolios performance before presenting it to clients. To window
dress, the portfolio manager will sell stocks with medium to large
losses and purchase high flying stocks near the end of the quarter.
These securities are then reported as part of the fund's holdings
for that quarter. (investopedia.com)
According to the December 2011 article in SmartMoney: A statement
of stocks in the portfolio doesn’t detail all of a investment
manager’s trading activity; the statement is just a snapshot of what
it owned on a single day and hence the performance of that
snapshot is the reported return.
According to the WSJ article printed on Dec 24, 2011 in section
B-1 entitled "Now that is Performance Art", they detail situations
of end-of-year trades. "Many stocks that won big for the first 50
weeks of the year levitate even higher the final week or two." In
short, managers are buying stocks that were winners for the year and
dumping their losers so the end-of-year statement will have a
decidedly better return.
You probably are thinking, that only happens on Wall Street stuff
and doesn’t happen to me. The investments managers with the big
investment companies may get involved with the window dressing
practice. But, also I would suggest so do the smaller investment
companies.
A Case Study
I went to meet with a potential client. It was a typical sort of
meeting until he said "I know I need planning but my broker has done
a great job with my stocks inside my IRA".
The potential client produced a typed sheet listing the
past 10 years of returns and every year was positive including 2000,
2001 and 2008. I said: "WOW" that is amazing. For a second I
thought, maybe I should see if the broker could handle my clients’
money. Being puzzled, I asked the gentleman if I could see his
quarterly statements. He produced the most recent investment
statement with all the trades.
I looked over the numerous pages in the statement. Then I saw a
lot of trades near the end of the quarter. Trying to understand the
situation I asked: "How much money did you give the broker initially
and about how long ago." The potential client said I gave him
over $600,000 about 8 years ago and I have not taken any money
out. I looked at the account total which was significantly
less than $500,000. So I asked the obvious question. If
this broker never had a losing year, why do you have so much less
money in the account now than you did 8 years ago?
The potential client and I looked at the trades which were made
about a week before the close of the quarter. There were a bunch of
stocks sold and a bunch of stocks purchased. The settlement date was
before the end of the quarter. So all of the new purchases showed up
on his statement. He had many accounts and had only looked at the
returns for each account and not at the actual dollar amounts.
Unbelievably, portfolio window dressing is legal and can lead to
a differential between actual portfolio performance and reported
portfolio performance.
Reconcile the Reported Returns
You should be looking at your end-of-quarter statements to see if
there is a flurry of trades made just before the end of the quarter
and does the stated performance of the fund match with your account
value? You need to take the reported returns from each investment
company and compare that number to the dollar amount change in your
account.
Secondly, if your statements are typed I would suggest that is a
red flag. Typed statements are of concern to me and would cause me
to ask more questions.
At Handwerk Wealth Advisory, we use an outside and independent
computerized compilation service which reports investment
performance and actual holdings in one consolidated statement.
I suggest to my clients to pick a quarter periodically, and see
if the statement from the investment company matches the dollar
amount in the quarterly statement we provide.
See you next month…
Derrick Handwerk MBA CWS® CWPP™ CAPP™
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
Asset allocation seeks to maximize the performance of your
investment portfolio using diversification and disciplined
investing. However, using an asset allocation methodology does not
guarantee greater, or more consistent returns, or against loss:
rather it is a method used to manage risk. Your investment
objectives, time horizon and risk tolerances will drive your asset
allocation and help you determine the right balance for you.
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC
Derrick
Handwerk