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What Is 'Style Drift'?

July 07, 1998|PAUL J. LIM

"Style" refers to where your mutual fund invests your money. For instance, large growth funds presumably invest in large U.S. companies whose earnings are growing faster than the market as a whole. European funds are expected to have most of their money in European companies, and so on.

"Style drift" occurs when a fund that calls itself one thing invests in some other type of securities. The reasons for this drift vary. Sometimes it happens by accident. For instance, if a small-cap manager picks a portfolio of winning stocks, the market capitalization of the holdings will invariably rise. Unless the manager sells those winning stocks, the portfolio may soon look more like a mid-cap fund.

Other times, managers who are free to invest as they please will drift on purpose, in hopes of improving returns.

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