Style drift

Style drift occurs when a mutual fund's actual and declared investment style differs. A mutual fund’s declared investment style can be found in the fund prospectus which investors commonly rely upon to aid their investment decisions. For most investors, they assumed that mutual fund managers will invest according to the advertised guidelines, this is however, not the case for a fund with style drift. Style drift is commonplace in today’s mutual fund industry, making no distinction between developed and developing markets according to studies in the United States by Brown and Goetzmann (1997) and in China as reported in Sina Finance. When style drift presents in mutual fund, the investment information about the fund becomes misleading. Given that in reality, style drift is generally undetected, the information asymmetry of investment information has important consequences for fund investors seeking to maximize fund returns. Researchers such as Brown, Harlow and Zhang (2012) demonstrate that deviated fund tends to become another fund product of different risk returns profile that is not aligned with investor’s initial investment goal. This is supported by a most recent study by Chua and Tam (2020), researchers find that style drift behavior prevents fund managers from picking superior stocks to meet investors' expectation for fund performance. In the same study, Chua and Tam (2020), finds that fund managers have a tendency to use style drift to maximize compensation, which is a demonstration of agency problem in mutual fund industry. It is widely acknowledged that style drift is a common practice particularly by active mutual funds in the financial markets. While passive funds (often called "index funds") employ a buy and hold strategy often following an index, active funds take on an active investment approach by picking stocks that move in and out of the market. It is therefore common for active funds to embrace different investment styles and consequently, investors of active mutual funds need to keep an eye on their fund's risks exposure since style drift can impact risk exposure.