Are Oakmark Select and Fidelity Contrafund Drifting?

While many investment topics generate heated debate, one that qualifies as among the most divisive is the issue of style drift, and whether it's worth paying attention to. Those who insist that style consistency matters say that it keeps managers disciplined and focused, while those who disagree say it's too constraining and hurts investment results. The correct answer, in my opinion, is somewhere in the middle. More specifically, while there's some utility in evaluating style drift, the key thing for investors to focus on is strategy drift. As such, investors should not automatically assume that a shift in the Morningstar style box automatically equates to style drift.

In fact, the changing nature of the market and a manager's ever-growing experience mean that his or her strategy will naturally undergo some tweaks. While a manager who is throwing in the towel, performance-chasing, or simply caving in to pressures from the marketing department should be viewed with extreme skepticism, a manager who is solely reacting to what the market is serving up deserves more rope.

That's why investors shouldn't react unfavorably to two prominent funds-- Oakmark Select (OAKLX) and  Fidelity Contrafund (FCNTX)--that are changing their categories this month. Select is moving from the mid-cap value space to the large-cap value camp because manager Bill Nygren has increasingly looked at larger stocks for new opportunities. Some may say that this is partly driven by necessity--the fund is large and won't own stocks with market caps smaller than its asset base, which currently stands at more than $5.5 billion. Still, the move to large-cap territory is consistent with the fund's value leanings and reflects the fact that large caps' relative underperformance has left them looking cheaper than the broader market. After all, it isn't just Nygren, but a passel of well-known value hounds who are increasingly pointing to the relative attractiveness of large caps. As such, we don't see much reason to be concerned about strategy drift here.

Similarly, Fidelity Contrafund's move from the large-blend category to the large-growth category makes sense. Manager Will Danoff runs an eclectic portfolio that is rarely a good fit in one part of the style box. He simply goes where he finds the best ideas. Lately, with the continuing underperformance of growth stocks, he's gotten comfortable with valuations in that area, particularly because he believes that these companies are poised to deliver growth in the current economic environment. Again, we don't think the strategy has changed, just that the nature of the stocks meeting Danoff's criteria has.

To be sure, such moves do present a challenge from a portfolio building perspective. If you bought a fund to fill one niche in your portfolio and it suddenly doesn't, then it can be a headache. To avoid such situations, I'd recommend that you build some flexibility into your portfolio by remembering that individual funds own stocks in multiple boxes. As such, rather than trying to force a fund into every square of the style box, try to approach the process by identifying managers whose strategies you are comfortable with. Then try to pull those together in a portfolio by eliminating excessive overlap in strategies. Chances are that this will result in a well-diversified portfolio that won't get you too hung up on individual style-box moves. A clear understanding of the strategy is also likely to help you more effectively evaluate when a shift in the style box is truly a sign of strategy drift, and when it is not.