The Existence of Window Dressing in Indonesias Stocks Mutual Fund and Its

Correlation to Funds Future Performance

By Calista Elvina Jesslyn
NIM 19012092
Chapter I
1.1 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 201.8 trillion by the
second quarter of 2014. Stocks mutual funds contributed about 42.69% of the total
investment. The target for 2015 is increase of flow by 15%.
In order to achieve a favorable portfolio and increase investors flow to the fund,
approaching the end of year, a phenomenon called Window Dressing is frequently heard
in the ears of securities investors. It has been both globally and locally known for years,
yet it is still unobservable because the investors are only able to access the report on a
certain period.
The term window dressing itself is defined as a strategy used by mutual fund and
portfolio managers near the year or quarter end to improve the appearance of the portfolio
or fund performance before presenting it to clients or shareholders. To window dress, the
fund manager will sell stocks with 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 to
attract investors.
This practice of altering and distorting portfolio has the potential to negatively
affect the fund value. Assumed that managers who engage in window dressing do not
have the sufficient skills, incur high levels of trade costs, it is speculated that their future
performance should be averagely poor (Agarwal, Gay, and Ling 2014). This assumption
is linked to a previous literature stating a positive association between career concerns of

managers and their risk-taking behavior (Khorana 1996; Brown, Harlow, and Starks
1996; and Chevalier and Ellison 1997). A manager who performs poorly might want to
take the risky bet of losing investors flow to window dress their portfolio.
Since many investors evaluate funds based on a calendar-year basis, it provides a
greater potential for the managers to window dress in December. The window dressers
can also benefit from tax-loss selling and pool themselves to this occasion (Brown,
Harlow, and Starks 1996). In Indonesia, the managers are obligated to disclose annual
financial report after audited by accountant in BAPEPAM by the end of third month after
the last date of reporting.
If the stocks mutual fund managers purchase winning stocks and sell the loser
stocks in big amount of money, the result of this act is the term window dressing itself
might become an annual phenomenon in stock market in which the stock prices
potentially rise towards the year end report submission. The increase usually happens in
December, during the end of December to the early days of January, or precisely the last
5 days of December and the first 2 days after New Year. The price of Jakarta Composite
Index always rises for at least 2.14% from November to December within the past
decade. The highest jump was on 2003 with 12.12% incremental increase. Even during
the crisis in 2008, the index increased from 1241.54 to 1355.41 for about 9.17%.
1.2 Problem Formulation
An alleged annual phenomenon in the stocks mutual fund in Indonesia called
window dressing, which is engaged by the fund managers in stocks mutual fund to
present a favorable report and portfolio to the clients or shareholders. The practice of this
term is unobservable by investors since the disclosure of report is only available on a
certain time. Window dressing is associated with unskilled managers in a poorly
performing fund during the quarter. Therefore, it is assumed that window dressing is
associated with a lower future performance of the fund. The purchases of winning stocks
by several funds in big amount of money potentially have an impact to the movement of
Jakarta Composite Index. Explanation above concludes research questions as follow:
1. Does Window Dressing in Stocks Mutual Fund exist in Indonesia?
2. Is Window Dressing negatively related to funds long term future performance?

3. Is Window Dressing negatively related to funds short term future performance?

4. Does Window Dressing have a significant impact to the Jakarta Composite Index?
1.3 Research Objective
a. Identify the existence of Window Dressing in Stocks Mutual Fund in Indonesia
b. Identify the correlation of Window Dressing on funds short term performance.
c. Identify the correlation of Window Dressing on funds long term future performance.
d. Identify the impact of Window Dressing in Jakarta Composite Index.
1.4 Scopes and Limitations
This research examines the movement of 100 stocks mutual fund in Indonesia for
7 years from 2008-2015. The data sampling will involve analyzing data on the beginning
of each quarter to the end date of each quarter for 7 years. The methodology limitations
of this research will gather data from quarterly reported holding, annual reported holding,
fund fact sheet, and annual report.
1.5 Writing Structure
Chapter 1 Introduction
This chapter portrays the rationale of this topic and explains the background information
of this research and followed by statement of problem, research objective, research
questions, scopes and limitations, and writing structure.
Chapter 2 Theoretical Foundation
The chapter provides strands of literature which supports the evidence and lists previous
related researches to the topic.
Chapter 3 Methodology
Detailed methodology to answer predefined problem will be explained in this chapter.
Chapter 4 Data Analysis
This chapter will explain how the researcher processes the data to fulfill the research
objectives and answer the research questions.
Chapter 5 Conclusion

This stage shows the correlation between the results of the research with the research
objectives. It should also prove that the result of the research can answer the research
question asked before. The author will also recommend future steps and improvement.