Style drift

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 ?
Unwillingness to provide transparency Investors will assess strategy, disclosures made to other investors and track record, and expect access to sample portfolios to perform detailed risk analysis and identify style drift.
MPI created DSA to transcend the limitations of traditional RBSA - such as lag, overfitting, and inability to capture style drift and detect leverage - and give investors greater insight into their investment portfolios.
Whatever the pedigree of the manager, it's in these early stages that close monitoring of risk and style drift are most essential.
If unhappy with performance, style drift, a change of managers, high expenses or changed investment objectives, an insurer is usually limited to closing the fund to new purchases by policyholders and/or not offering it in new products, said Nancy Kenneally, senior consultant with Tillinghast Towers-Perrin.
If at all possible, portfolios are fully invested; style drift is eschewed.
In the year to come, investors will be still more unforgiving in scrutinising re-up requests: they cite poor performance from a GP's current fund, investment style drift and disruption within a GP team as the factors that will most discourage them from re-investing.
But unfortunately, when a fund manager engages in style drift, he or she can undermine a client's asset allocation.
Utilize MPI's proprietary models and statistics to detect style drift more quickly than other methods and see "red flags" before the blowups
Our recently completed survey of single family offices, found that over 70% cited "lack of transparency" as a key concern - ahead of performance, style drift and even fraud," said Chris Mears, Principal-in-Charge of the New York Metro Financial Services Group at Rothstein Kass.
The main points I sell are the cost advantage, low turnover--which reduces transaction costs and saves taxes--and the absence of style drift.
NEW YORK -- 2008 was a notorious year for hedge funds with negative absolute performance, liquidity problems, style drift and manager fraud.
Other concerns sited include lock-up periods (60%), style drift (55%) and fraud (37%)