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 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.
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