Style Drift Defined
Style drift is the name given to the occurrence when a fund “drifts” away from its stated investment objective. I also use the term style drift for a fund that drifts between styles, even if it is within the stated investment objective.
Style drift is a common occurrence. If you track a fund’s style, over time, you may noticed that it bounces between one or two categories. It could be a shift from small-cap growth to small-cap value, for example. Or it could even be more dramatic like a shift from a small blend fund to mid-cap growth fund. Sometimes you can even tell by the name. For example, if you suddenly see American Century Mid Cap Value listed as large growth in Morningstar--something is not right.
Why You Should Be Concerned About Style Drift
Style drift is a sign of an inconsistent fund. As mentioned earlier, asset allocation is very important. If you purchase a fund, expecting it to represent a certain style or category in your overall portfolio, you expect it to stay true to it’s category over time. If it doesn’t, your whole portfolio can quickly become unbalanced.
It’s true that people sometimes purchase funds with a certain degree of latitude expected, especially in the case of an actively managed fund. In these cases, style drift isn’t as big of a concern, but still something worth keeping an eye on. If you start to notice your fund manager jumping on the bandwagon of past trends, it may be an indication of the manager trying to save his own hide. The goal is to buy low and sell high, not jump in late and suffer the consequences.
Why Style Drift Occurs
We are all guilty of style drifting from time to time. When one of our investments does well, we may not sell it to rebalance our portfolios as soon as we should. If a fund manager were to have difficulty letting go of Google stock, for example, they may find themselves overweighted in tech stocks, thereby changing the overall composition of their fund.
Style drifting can even happen in index funds and ETFs. By comparing your index funds to a benchmark, you can keep an eye as to whether the index is drifting.
Other times, style drift is a perceived trend that may not be accurate. I used to work with a small fund company that would often find itself re-categorized by Morningstar, because it didn’t really fit into any of Morningstar’s category types. It wasn’t really drifting, it was just re-classified. The good news is that I’ve seen Morningstar expand their list of categories over the past few years.
In Summary
It takes real discipline to stick to a set of stated investment objectives, but it is also a requirement for a fund that wants to play a role in investors’ portfolio holdings. Always keep an eye out for style drifting in your funds and consider selling a fund that isn’t consistent.
