Understanding Style Drift in Mutual Funds: Causes & Implications

Mutual funds can experience style drift, or a movement away from their initial intention, over time. In general, portfolio managers who consistently use the mutual funds stated intentions as a guide for investments are desirable for most investors. Mangers who are constantly changing plans in order to chase profit schemes can be a headache for many investors. However, there are times when style drift may be necessary and advised.

Mutual Fund Style

When you invest in a mutual fund, you have likely selected it because it matches your personal investment goals. For example, some funds are targeted toward commodities trade, currency exchange, green energy or manufacturing sectors. You choose the mutual fund because you believe the specific sector it concentrates investments toward has a high chance of profitability or because you simply want to fund those types of initiatives. Similarly, you may choose a mutual fund because you are comfortable with the risk of its portfolios. High risk investors may choose to become involved in riskier mutual funds, while low risk investors may prefer funds focusing on bond options and low risk investments. When you select your style, you are choosing your fund manager because he or she shares your goals. When the manager changes suddenly, you may be alarmed with the fact your funds are now being allocated toward investments you do not feel you authorized.

When Style Drift is a Risk

Style drift can be alarming if you feel your manager is simply wavering in an attempt to realize quick profits or results. If the market shows a sudden interest in real estate, for example, your manager jumps on board with these options. As the real estate market declines, all of a sudden your manager is putting your funds toward rice or grain trading. This is a sign of a manager who may be under demands from his or her corporation to realize profits in a constricted time table. The manager may start growing concerned he or she will lose responsibilities by creating negative returns, and these schemes are attempts to save a failed initiative. While some managers may see success with these decisions, they will not be generally popular to most investors who prefer consistency.

Positive Benefits of Style Drift

When style drift is not rapid and constant but slow and predictable, it can be a sign a fund manager is tracking trends over the lifetime of the fund. Instead of quickly jumping ship from investment to investment, the manager is simply adapting the original intention of the fund to the current market situation. For example, in 2007, you may have been involved in a mutual fund that was heavily-invested in auto manufacturing. Your fund manager, watching the credit markets, could have anticipated auto manufacturing would experience sharp drops in the coming years. Instead, the manager switched some investments to manufacturing of green technology. The fund was still involved in the manufacturing area, and may even have shown a consistent approach to risk. This type of drift is generally less concerning to investors.