A style drift occurs when the manager of a mutual fund, which is a pooled investment opportunity that attracts multiple investors, changes the investment strategy of the fund. This can occur because the manager is looking for better growth from the fund's assets or because of a fundamental change of the assets themselves. Fund managers may have different levels of leverage to attempt a style drift depending on the circumstances. Such a scenario can be problematic to investors in the fund because it may cause increased risk levels and decreased diversification.
Many investors choose mutual funds because of the diversification that they provide with just a single investment. In addition, managed funds take the decision-making process away from the investor and put it in the hands of a fund manager with extensive investment experience. Most managers spell out their investment strategies in the investment prospectus of the fund, which is a written document provided to investors detailing the assets within the fund and other pertinent information. When a fund manager veers away from his or her initial strategy, it is known as a style drift.
There may be benefits to the investors of a fund if a style drift occurs. The value of mutual funds is dependent upon the net value of all of the assets included within the fund. A fund manager may at times need to adjust the fund's portfolio to account for poorly performing assets. If a fund manager has a proven track record, an investor is more likely to trust a sudden strategic shift.
In addition, changes within the assets themselves may necessitate a need for a style drift in a fund. For example, some funds base their investments on the size of the companies that issue the stocks. If certain companies either increase or decrease their market size, they may fall out of the intended realm of the fund's investments. Should this occur, a fund manager might have to make adjustments on the fly to account for these changes.
Investors should keep a close eye on the actions of their fund managers, because a style drift can prove problematic. If a fund manager starts going after assets that are riskier than the original strategies of the fund intended, the individual investor might find his own capital exposed at a greater level than he or she would otherwise prefer. In addition, changes of investments within a fund might lead to some overlap with the investor's personal portfolio. This actually decreases the diversification that mutual funds are supposed to provide.