IFA
Index Porfolio 90
IFA
Index Porfolio 70
IFA
Index Porfolio 50
IFA
Index Porfolio 30
IFA
Index Porfolio 10
Step 6 - Style Drifters
COMPREHEND ACTIVE MANAGEMENT STYLE DRIFT
Most mutual fund mangers drift from one recent winner to another, playing carelessly and aggressively with investors’ money. The investment objective that funds initially state is altered by these changes, with one study indicating that 40% of mutual funds drift from their originally stated style. To make matters worse for investors, style performance rotates randomly, with no chance of consistently predicting tomorrow’s winning style.
Style drift occurs when an active manager drifts from a specific style, asset class or index that is described as the stated investment purpose of a fund. Style drift is a serious problem for investors who believe they are invested in a portfolio that matches their risk capacity. Since managers of active funds seek to outperform the benchmark, they often chase returns by wandering outside the boundaries of the benchmark, thus altering the fund’s exposure to risk and its volatility of returns. One particularly egregious example of style drift is the Fidelity Magellan Fund as shown in the top figure below. In the 16.5- year period from 1988 to 2004, Magellan morphed and evolved several times. For example, in mid-1995, approximately 70% of the fund was invested in large value, despite the fact that its benchmark was the large-blend S&P 500. |
In contrast to the style-drifting
tendencies of actively managed funds like Fidelity’s Magellan,
passively managed funds, specifically those provided by DFA,
adhere to strict rules of construction and they are held
constant regardless of market conditions. The figure on the
bottom shows the relative style purity of the DFA US Large
Company Fund which also has the S&P 500 as its benchmark. |
Additional Charts and Graph from Step 6
| < Step 5 - Manager Pickers | Step 7: Silent Partners> |
