Researchers [5] demonstrate that a fund, once deviated, is essentially a different product, with a risk-return profile that is not aligned with the investor’s initial investment goals.
It is widely acknowledged that style drift is a common practice particularly by active mutual funds in the financial markets.
[12] and “valuation” [13] effects other than a single factor exposure of market risk under the assumptions of the Capital Asset Pricing Model (“CAPM”) developed by Sharpe-Lintner-Mossin in the 1960s.
In contrast to returns-based technique, holdings-based approach better reflects the true investment style of an active fund but analysis requires more time and is more costly to execute.
One of the key conclusions in the existing literature is that some funds perform worse than others due to larger portfolio risk exposure and higher trading costs which are found to be correlated with greater volatility in investment style.
[5] In another study by Chua and Tam (2020),[6] fund managers engage in style drift are found to have weaker stock picking abilities.