Style Drift

Style drift. Style drift occurs if an investment manager moves away from the investment mix that's appropriate to a mutual fund or managed account portfolio based on the portfolio's objectives and style.

Such a drift typically occurs if the core portfolio is providing disappointing returns while other investments in the marketplace are performing better. In this case, a manager may feel pressure to increase the bottom line. The drift may also occur inadvertently if some of a portfolio's underlying investments take on different characteristics. For example, a small company may become a mid-sized company or a value investment may increase substantially in price.

The danger of style drift from a portfolio perspective is that you might end up owning investments that are more or less risky than you intended or that exposed you unexpectedly to portfolio overlap.

Advocates of index investing cite style drift as a key disadvantage of actively managed funds, pointing out that index investments stay true to their style no matter what's happening in the economy.

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Style Drift

What Does Style Drift Mean?

The divergence of a mutual fund from its stated investment style or objective. Style drift occurs as a result of intentional portfolio investing decisions made by management, a change in the fund's management, or, in the case of stocks, a company's growth.

Investopedia explains Style Drift

Generally, a portfolio manager's ability to manage and commitment to managing a fund's assets in accordance with its stated investment style over the course of several years is a positive investment quality. For obvious reasons, consistency in this area is preferable to style drift. Managers chasing performance have been known to resort to using different strategies that are often counterproductive and can change the risk-return profile of the fund. Nevertheless, fund investors need to exercise some flexibility in making judgments about a fund's investment style stability. Some funds allow for a “go-anywhere” style, which means that the manager will do just that. Also, it is not unusual for small-cap and mid-cap companies to grow in size, which means that a fund may shift capitalization categories accordingly. Circumstances can justify giving the fund manager some leeway. A history of consistent, above-average total returns may override any concerns about style drift.

Related Terms:
• Asset Allocation
• Diversification
• Growth Stock
• Style
• Value Investing