Style Drift (Still) Happens: When equity returns get more volatile, style drift increases

Style drift is the propensity of mutual funds to migrate from one category to another within the Morningstar Style Box. It can present a significant dilemma for planners who recommend funds to clients. Our study shows that style drift is still occurring, despite fund companies' efforts to control it. A study utilizes data over the eight years from 1995-2002 and includes 523 domestic equity funds with at least 10 years of performance history (as of August 31, 2003) and no more than 20% of their portfolio in bonds, non-US stocks, or cash. In this study, style drift was identified and measured by calculating the standard deviation of eight annual style scores. Among the 239 funds that had style drift, the average standard deviation was 0.8. The highest possible standard deviation (or style drift score) was 4.3, which would have been achieved by a fund fluctuating between large-cap value (1) and small-cap growth (9) annually over the eight-year period. An associated No-Drift All Stars box lists the best of the best among non-drifting funds - the five funds per style box category with the best risk-adjusted performance over the eight-year period. These funds experienced no style drift between 1995-2002.