Style Drifters

When you buy a box of Corn Flakes, you expect corn flakes in your cereal bowl. It is a safe and reasonable assumption that you are getting what you think you are buying. You know you are not buying granola or oatmeal. The name on the box is true to the box’s contents.

This is not the case with active fund managers who engage in style drifting. A style can refer to the asset class, index, market segment, or classification that a mutual fund states as its objective, described as the fund’s investment purpose. When active managers style drift, they do not stay true to the type or name of a fund in which your money is invested. They do this by drifting from a fund’s stated style into another style that no longer represents the fund’s objective. For example, you may have intentionally invested in a growth fund; then unbeknownst to you, your active manager takes 30% of your fund and puts it in cash and bonds. This changes the composition of your growth fund by altering the risk exposure, return and time horizon of your investment. The fund no longer matches its name or style. With index funds, the name of a fund corresponds to the contents of that fund, what I would call “style pure.”

Step 6Style DriftingStyle PureStyleasset classindexmarket segment