Style drift
Style drift is an (gradually increasing) inconsistency between the stated strategy that a portfolio or fund should follow (e.g., as specified by its mandate) and the actual investments made.
Why style drift occurs
The main reasons style drift occurs is that fund managers are usually strongly motivated to out-perform in the short term. This provides a temptation to switch to a strategy or asset class that is expected to out-perform in the short term.
An example of this would be the manager of a value fund buying growth shares. This is a common temptation because growth share provide a better chance of short term out-performance through active management (even though their long term performance tends to be worse in the long run).
Drift also often occurs through re-allocation of assets — for example, a manager of an equity fund who has a pessimistic outlook may hold cash or bonds.
Identifying style drift
The simplest way to check for style drift is to look at what holdings a fund has. This is needs continuing monitoring: a fund that has stayed consistently with its stated style so far, may well change before it next reports its holdings.
In order to make this easier to monitor, there are services that present in forms that are easier to use. Morningstar research reports show a graphical analysis of fund style, while Trustnet provides a simple graph showing asset allocation and a breakdown of the largest holdings. A more sophisticated approach uses a numerical measure of style drift along with similar numbers to classify a portfolio's style and style history.
Immunity of index funds
Index trackers and mechanical strategies are immune to style drift. This does assume that if a style index is tracked, that the index is itself well constructed enough to be free of style drift. Indices are invariably very carefully constructed and are more transparent than funds so this should not be a problem.
