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Tuesday, February 9, 2010

What is Style Drift?

Style drift is the divergence of an investment portfolio from its stated investment objectives. This is a common issue for many mutual funds and portfolios managed by money managers. Style drift can be intentional or unintentional. Although style drift is considered a 'bad thing'; sometimes it helps the fund to outperform others or to minimize risks through careful investments.

Most mutual fund style drifts occur when the fund manager deviates from long-term strategy to reap some short-term profits. Other causes include,
  • Change of investing strategies with respect to changing market conditions.
  • Re-allocation of portfolio asset for adjusting risk or reward.
  • Change of fund's management team.
  • Performance of similar funds, demanding portfolio adjustment to meet them.
  • Outperformance or underperformance of some assets in the funds holding.
  • Giving more freedom to the fund manager for active portfolio management.
In general, a fund manager's ability to stick with the original goal is considered a positive attitude. There are some services available to monitor the funds style, performances and asset allocation changes. Portfolio that tracks specific indexes (eg: index funds and ETFs) are often immune to style drifts because the indexes are usually very broad and transparent.

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posted by NobleTrading at 5:24 AM

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