Definition of window dressing

Deliberate actions by banks, broker-dealers, mutual funds and portfolio managers and institutional investors to divest of obscure, non glamorous and poorly performing stocks towards the end of the year. This is an effort to improve the structure of their stock portfolios just before they report to clients in their annual reports or before the end of a reporting period.

A key aspect of managing other people’s money is to keep your clients invested with you. Clients are typically happier if you show that you hold a basket of stocks that have performed well and that other people have invested in.

Towards the end of the year and as the end of reporting period approaches, institutional investors sell underperforming and obscure stocks and move their money into more popular or well-known stocks. In the process, they depress these stocks’ prices towards the end of the year. At the same time, this action can also increase the popularity of broadly-based, glamorous and outperforming stocks as portfolio managers gravitate towards strong performers to include in their reports to clients. [1]