Understanding Intentional Style Drift in Investment Portfolios

There are a few basic reasons behind intentional style drift within a portfolio that can be either negative or positive. Style drift is the phenomenon of an actively managed portfolio deviating from its described mandate. For example, if the average market capitalization of a mid cap fund were to grow beyond what the fund’s prospectus stated as the acceptable range, this would be considered style drift.

Positive Reasons

The positive reason that this could occur is that the fund’s holding had appreciated significantly. This would cause the average market cap of the stocks in the portfolio to rise, potentially surpassing the mandated maximum. When this occurs, it is because the fund is performing very well. Funds are usually rebalanced at regular intervals, so this may intentionally occur between rebalancing dates.

Negative Reasons

The negative reason why intentional style drift may occur is that the manager is attempting to capture added performance by making trades outside of the mandate. This may imply that the manager has lost confidence in the strategy, or that he or she is making an opportunistic trade. In any event, it is a matter of concern because you may have allocated your total assets on the assumption that a fund will follow its mandate. If this is violated, it may cause you to be taking unwanted exposure.