Monitor for Style Drift
While studying for CFA, there was one whole section dedicated to style drift, Investopedia defines
Style drift is the divergence of a fund from its investment style or objective. Style drift can result naturally from capital appreciation in one asset relative to others in a portfolio. It can also occur from a change in the fund's management or a manager who begins to diverge from the portfolio's mandate
Funds or Individual investors are very prone to this sometimes even unintentionally, folks who are managing public money are under constant watch and therefore any short and long term under performance can force them to switch styles. I haven’t seen much success for funds or individuals who have consistently switched styles.
Why I am speaking of Style drift?
Quant AMC
They have had a tremendous success in last 3-5 years by being top 3 in most categories where they have decent assets under management
source : business today
What had brought their success ?
Though not publicly documented, I think it is due to the fact that they follow some Trend following or Momentum system or Quantitative systems
The challenge has been of marrying momentum with qualitative research, and assimilating various macroeconomic variables and time series data with cross-sectional data. It has worked well for us and we hope to continue our best efforts in that direction.”
– Sandeep Tandon
A white paper done by Alpha Architects demonstrates that blending styles (or Style drift) actually worsens the outcome
Overall, the evidence suggests that a blended strategy, which combines Value and Momentum into a single unified process, is worse than allocating 50% of your capital to a pure value investing fund, and 50% to a pure momentum investing fund.
We have to wait and see if we catch a style drift in some of the Quant AMCs schemes,
What should an individual investor do to benefit from different factors that bring alpha in equity investing?
Spilt Capital across managers or styles
Avoid managers or funds which don’t have clear strategy on how they will generate Alpha
Monitor for performance and check if any style Drift
Remain invested till style is maintained exit if divergence is noticed
How to practically implement it Indian markets?
This is a hypothetical spilt and should not be treated as investment advice, I may be invested in some or all of below and may exit without any notice.
