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The style drift threat returns

The funds industry often likes to talk about different investment styles, and it’s a topic that can quickly get divisive. Value investors have long insisted their style was due a sustained comeback, but certain quality growth managers took a fairly dim view of that idea.

Rather than joining one of these sides, from a portfolio construction perspective it can make sense to diversify across the different styles and offset some of the pain of market rotations. We’ve seen the wisdom of that to an extent in the recent sell-off, with value funds holding up better than their growth counterparts.

And yet life is not always so simple. The spectre of style drift, where a manager sees their stated style or specialism falls out of favour and consequently “drifts” into other parts of the market to limit underperformance, means a fund won’t always do what you want. This can be hugely important when markets turn: if a self-proclaimed value fund has drifted outside its remit and into the likes of growth stocks, it could then fail to offset the pain elsewhere in your portfolio when growth stocks slump as they have this year. If you are deliberately holding a mixture of funds with different styles, such drift can undermine your attempts at diversification. That's one reason why professional investors sometimes worry even more about style drift than a fund's actual underperformance.

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