Watch out for fund's 'style drift'

Manny Pohl, chief executive, ECP Asset Management

An important term for investors to be aware of is “style drift”, where fund managers move away from their stated investment style or broad investment parameters to find better shortterm returns for their investors.

Investors must be clear about their investment strategy, their mix of managers and what they are looking for from their managers. There will be times when the best money managers in the world

– as judged by various market metrics – underperform and the temptation will be strong for them to take advantage of short-term market sentiment.

For example, a growth-style manager, seeing their growth assets under pressure as future growth is heavily discounted by investors, considers buying value stocks to improve their performance. While this style drift may create a shortterm benefit, it usually doesn’t produce the expected outcome and the long-term consequences may be significant. Value stocks appearing in a growth portfolio would be cause for concern.

For individual investors, keeping track of a fund manager’s adherence to their stated style is worth the effort. For instance, always read the monthly report to understand why the manager has made certain investment decisions and what has contributed to performance (or underperformance). Analytics on managers that may contain “style snail trails” are also useful.

If you are invested in a fund manager and the fund is performing badly relative to the market, consider the underlying reasons for that under-performance. If it is a “black swan” or unexpected economic event – such as the UK’s decision to the leave the European Union, a country defaulting on its debt repayments or the election of an unpopular president – then probably no further evaluation is necessary. However, if the manager is underperforming other managers in the same style cohort, then further evaluation is clearly necessary.

If the manager is investing in the way that was promised, however, and is on track for the long-term returns expected, think carefully about any decision to exit especially when the markets are volatile.