FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A manager's rolling 36-month style analysis shows the weight in small-cap growth rising from 10% to 45% over three years, while the fund's stated mandate is large-cap blend. The fund has outperformed its large-cap benchmark by 2% a year. Which conclusion is best supported?
The rising small-cap growth weight indicates style drift away from the large-cap blend mandate. The 2% outperformance may come from that unintended style exposure instead of skill within the mandate, so it should be monitored and attributed carefully rather than accepted at face value.
- AStyle drift is present, and the outperformance may reflect unintended small-cap growth exposure rather than skill relative to the mandateCorrect
- BThe manager is demonstrating pure stock-selection skill because tracking error is high
- CThe benchmark should be replaced with small-cap growth retroactively to remove the alpha entirely
- DStyle drift is irrelevant because the excess return is positive
Explanation
Rising exposure to an unmandated style indicates drift, which can create excess return from style bets and add risk the client did not choose. The outperformance should be reassessed against a benchmark reflecting the actual exposures, but retroactive replacement is not the issue; drift undermines the attribution of the 2% to skill within the mandate.
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