CLIENT LOGINWEB MEETING
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6.1
Introduction

Style drift happens when an active manager drifts from a specific style, asset class, or index that is described as the investment purpose of a portfolio or mutual fund. For example, a manager may drift from small cap value to small cap growth.  This is a substantial problem if you have carefully determined your Risk Capacity™ and matched it to a Risk Exposure.  

Hypothetically, you may be intentionally invested in a growth fund. Then unbeknownst to you, your active manager takes 30% of your Large Cap Stock fund and puts it in cash and bonds. This changes your growth fund to a balanced fund, changing the risk exposure, return, and time horizon of your investment. 

To avoid style drift, it is best to implement your asset allocation with "pure style" index funds. Index funds are invested using clearly defined rules of ownership.  Forty percent of the time, actively managed funds follow a manager's drift to a market that the manager thinks will keep his shareholders happy and save his own hide. Unfortunately, the shareholders suffer in the long run. As we have seen in previous steps, this predicting or chasing of returns has resulted in "below market" performance.

Step 6
Quotes

Ron Surz " Style drift is a serious problem for [investors] because it distorts asset allocation and undermines performance when styles rotate. Value managers who have drifted over the past three years [1998-2000] toward more favored growth stocks are regretting those moves, but not as much as their [investors]. "
Ron Surz, President, PPCA Inc., Get the Drift, 2001
Rosanne Pane '' If a fund is drifting to a style that is dramatically different, your potential returns, volatility, and risk are going to change.''  
Rosanne Pane, Director, S&P Fund Services Group, Spotting 'Style Creep', When a fund starts to wander, returns can suffer, BusinessWeek Online
Craig Israelsen " One thing is clear: Style drift happens to a sizable percentage of mutual funds...For [investors or] planners seeking to create portfolios tapping into consistently different equity styles, style drift presents a significant concern."
Craig L. Israelsen, Ph.D, Drift Happens, Financial Planning Interactive, Nov, 1999
Robert Zutz " The SEC deems it a fraud if performance results are compared