Window Dressing and Bond Mutual Funds

Abstract

We examine portfolio credit quality holding and daily return patterns in a large sample of bond mutual funds and document significant evidence of window dressing. First, using portfolio credit quality holdings data, we find strong evidence that bond funds on average hold significantly more government bonds during disclosure than non-disclosure, presumably to present a safer portfolio to shareholders. However, there also appears to be a clientele of bond funds that increase positions in speculative-grade corporate bonds at disclosure, most likely in an attempt to advertise higher yields. Second, using daily returns data we identify return patterns that are atypical around disclosure periods. Specifically, we investigate the loadings that funds have on components of a multiple-index market model. We find that certain funds do appear to have different loadings on index components around disclosure periods than at other times of the year. Differences in factor loadings around disclosure periods indicate that the portfolio is tilted toward one sector of the bond market and away from another. Such differences are consistent with window dressing.

Keywords: Mutual Funds, Window Dressing, Portfolio Disclosure, Portfolio Composition, Securities Regulation

JEL Classification: G2, G1