Every investment you own should have a specific role in your portfolio. However, even if you've established an appropriate asset allocation, it's a rare portfolio that remains static for years. Even if you don't alter your holdings, style drift may make changes for you.

Style drift occurs when a portfolio undergoes changes in its original approach. It is neither good nor bad, but monitoring changes helps ensure your portfolio reflects your intentions.

Watching for hidden shifts

Mutual funds provide a good example of how style drift can occur. Each fund has an investment objective; however, its manager may have flexibility in how that objective is pursued. For example, an actively managed stock fund may be known for investing in value stocks--those the manager feels are underpriced--while another fund might favor growth stocks with rapidly growing earnings. Depending on a manager's view of the market's future, a fund that has focused on growth stocks may shift toward value--or vice versa. Its style has drifted, even though its investment objective may have stayed the same.

The more specific a fund's name, the less latitude its manager may have. For example, a fund with a specific asset class or style in its name--let's say the hypothetical XYZ Small-Cap Fund--must invest at least 80% of its assets accordingly. Be sure to review a fund's prospectus before investing; annual and semiannual reports should show any changes.

Getting caught in a drift

Another common example of style drift is a small-cap mutual fund that has large inflows of new assets. Because there are restrictions on how much of one company's stock a single mutual fund can hold, small-cap fund managers sometimes find themselves unable to invest enough in any individual small company to affect the portfolio's performance, and invest more in mid-caps. Or they may be reluctant to sell a solid small-cap company that has grown to mid-cap size. Still other examples:

• A manager who includes a significant percentage of international securities in a portfolio that has typically focused on domestic issues
• A portfolio that departs substantially from its so-called "neutral mix" of multiple asset classes

Even though it may be within a manager's discretion to make such shifts, style drift can affect your asset allocation. If your portfolio's expected return assumes that you have a certain percentage in, say, small caps or international stocks--or that you exclude them--your allocation and overall strategy can be thrown off without your realizing it.

Drifting away from an index

Style drift also can affect the standard by which you judge a portfolio's performance. Most mutual funds are benchmarked against a relevant index to ensure that you're comparing apples with apples. If a fund's style drifts dramatically, the index may be less useful as an indicator of how that fund compares to its peers. More importantly, determining the level and type of risk to which the fund exposes you may also become more difficult.

Don't overreact

Style drift may be part of a manager's overall strategy to try to boost performance. Staying on top of whether your investments may be undergoing a makeover, and understanding the reasons behind any style drift, can help keep your portfolio on track.