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Mutual Fund Style Drifting

When deciding on the investment of a particular sum of money you should concentrate not on picking of certain stocks or funds, but instead on the best allocation of your assets. Furthermore, your choice of a mutual fund is mainly influenced by its specific objectives, so that they coincide to a great degree with the goals you have set for your money. Unfortunately, there are times when the mutual fund diverts from the initially set course of movement.

What is a Style Drift?

The style drift phenomenon is observed whenever the mutual fund deviates from the pre-stated investment objectives or it moves from style to style within the same objective.

This is not a rare occurrence, since many mutual funds from time to time switch between two or more categories. This can be easily checked from the fund's style record. For instance, your mutual fund may have started with small-cap value investments and with the time oriented its resources to small-cap growth investments. The switch can be even more drastic, like moving from a mid-cap growth fund to a small blend fund. Be careful if you notice even a change in the name of the mutual fund itself. This often times means that the mutual fund has changed its style.

Style Drift Importance

You have chosen a particular mutual fund because of its investment style. If you see that the mutual fund changes its style form time to time, this represents an inconsistency in its investment strategy. As a result of such shifts you may experience imbalance in your portfolio, since you have selected this fund with its objectives in mind.

On the other hand, if you participate in an actively managed mutual fund you should always assume a certain room for style change. Nevertheless, you should carefully watch every shift from one style to another in order to avoid drastic portfolio imbalances. It is possible that your mutual fund manager decides to allocate resources to investments that have had high previous success, but of different style. Beware of such actions, since you may end up suffering unbeneficial consequences due to late entrance.

Style Drift Reasons

Despite the overall undesirability of style drift, it is not an uncommon occurrence. Sometimes, even when the time has come to sell a particular stock due to its high price, we are unwilling to do so in order to compensate for the not so good performance of other stocks in our portfolio. For instance, if you have accumulated a high number of Google stocks, thus misbalancing your portfolio, you will have to alter the composition of the latter in order to compensate for the disproportion.

Index funds and ETFs are not insured against style drifts either. But you can avoid them by selecting a standard against which to evaluate potential shifts from style.

You should also be able to identify whether a real style drift is taking place, since the mutual fund in which you participate may not be of a distinct category. As a result you may see it as being reclassified from time to time, which in itself doesn't represent a style drift. Luckily, the list of categories in which the mutual funds are being classified has been enlarged, so the possibility of incurring such an uncertainty is greatly reduced.

Conclusion

In today's dynamic mutual fund business, with its many investment opportunities at hand, adhering to the predetermined investment objectives may be a hard task. Nevertheless, think of selling the mutual fund whenever it makes drastic shifts from one style to another in order to save your money from the potential losses that may be incurred.

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