Style Drifting: Does It Add Value for Actively Managed Small-Cap Funds?

Investors choose mutual funds based on their investment objectives. In pursuit of said objectives, they can choose from among the broader asset classes (such as stocks and bonds) with additional, more specialized options available within each class. These decisions are important because they determine the amount of exposure an investor has to specific types of risk (for example, the risks of small versus large stocks and value versus growth stocks).

An issue for investors selecting actively managed mutual funds is that, while such funds specify their investment objectives in their prospectuses, there is no guarantee they follow their self-stated investment strategies. In fact, many active managers believe that their ability to drift across styles provides them with an advantage. However, if managers deviate from their stated style, they expose investors to unanticipated risks.

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