It's that time of the year for investment window dressing

Friday 29th June 2001

There could be an interesting time on investment markets today if various fund managers decide to fine-tune their portfolios at the close of their financial year.

Using the term "fine-tune" is a polite description of what is impolitely known as "window-dressing," the process whereby portfolios are reorganised and/or prices pushed up on relatively small volume at the end of a reporting period to give the year-end result a boost, albeit often an artificial boost.

The technique is used in many parts of the world, irrespective of protestations to the contrary, and there is no reason to believe it does not happen here.

Window-dressing may not always occur, and the extent to which it does happen will vary depending on how many people need to make returns look good and the range of shares that could do with a boost.

News reports of trading on overseas markets often use quaint terms to explain why stocks rise at such times.

Last year the wire service report on June 30 trading in New York, for example, said technology stocks closed higher on June 30, when investors "buffed up" their end-of-quarter portfolios by moving out of old-line stocks.

It was reported the Nasdaq composite index, which has a high proportion of technology stocks, closed 88.88 points, or 2.29% higher, at 3966.11 on June 30.

The Dow-Jones average index of 30 industrials was 49.85 points up on the previous day's figure, closing at 10,447.89.

Those movements can be compared with what happened on June 29.

The Nasdaq fell 63.11 points (1.6%) and the Dow-Jones was down 129.75 points (1.23%).

In 1999 both indices closed June at all-time record highs, although the Federal Reserve's decision to lift interest rates complicated the interpretation of how much movement was the result of fine-tuning, window-dressing, "buffing up," or whatever.

Another expression was used in 1999 to describe what happened in Australia, when the all ordinaries index closed lower on June 30 than the previous day.

It was said there was a rush of end-of-financial-year book-squaring by funds ahead of the close.

Last year there were solid gains among blue-chips in Australia on June 30.

The New Zealand sharemarket in 1999 was down on June 30, in terms of the NZSE40 Capital index, with a 10.89 points decline.

The small companies capital index picked up 18.98 points to reach 4925.01.

Last year there was heavy June 30 trading on our sharemarket, although Telecom, Fletcher Challenge, Fletcher Paper and Lion Nathan accounted for most of the $199.71 million worth of shares traded.

Turnover by volume across the whole market was 57.67 million shares, compared with 29.9 million on June 28 and 39.32 million on June 29.

The NZSE40 capital index was 5.42 points (0.26%) higher than on the previous day, while the small companies index was up 40.26 points (0.79%) at 5102.26.

There were 57 rises and 42 falls among the total number of stocks traded.

Back in 1997, the report from Australia quoted a broker as saying investors' "window-dressing" for the end of the financial year underpinned the strong trading on June 30 and the then all-time record close.

The New Zealand share market's strong performance on June 30, 1997 was attributed to some end-of-quarter book-squaring (that term again), with the NZSE40 capital index hitting a then all-time high of 2501.96 and rises outnumbering falls 96 to 26.

All the other New Zealand market indices were also at then all-time highs that day.

Things drifted off on July 1. It is clear there are many factors affecting sharemarket rises or falls at any time, in any market.

Playing around with portfolios at the end of a reporting period is only one, but it would be naïve to think the technique is never used, particularly if a regularly traded stock moves substantially on comparatively low turnover.

The fact that people in the securities industry have referred to window-dressing as part of the explanation for some end-of-year movements is another indication that it occurs, although how widely can never be established.

Any window-dressing that does occur has to be put into perspective.

It is impossible to rectify a poorly performing portfolio in one day's trading at the end of a year.

Moving things at the margin is the best that could be expected but every little bit can help the return.

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