Style drift

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Style Drift

A situation in which a mutual fund's investment strategies or goals change from what they were originally. Style drift can be explicit or implicit. For example, style drift may occur implicitly when a fund manager seeks ever larger returns for shareholders and tries out any number of investment strategies to achieve them. This is usually thought to be naive or even dangerous. Style drift can arise explicitly when a fund's situation has changed a significant amount; for example, a stock in the fund may grow to the point where it is advantageous for the fund to change its capitalization requirements. Style drift, if handled responsibly, can show flexibility on the part of the fund managers.

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.

References in periodicals archive ?
Although many of the articles are technical, all take into consideration the fact that hedge funds are a dark science to even some of the most experienced investors, so topics include integrating hedge funds into the individual and institutional traditional portfolio, analyzing style drifts, using synthetic desirability indices, designing a long-term wealth management strategy, investing through multimerger vehicles, using a calendar-time approach, analyzing efficiency, understanding volatility regimes and risks, skewing diversification, and optimizing portfolios.
Be prepared to change benchmarks if the fund manager's style drifts.
But unfortunately, when a fund manager engages in style drift, he or she can undermine a client's asset allocation.
Style drift can also skew the results of the benchmarking process.
We do not have to worry about mutual fund investment style drifts, or complicated and ever-changing analyses of underlying holdings.