Many multi-asset portfolios are failing to deliver the diversification benefits they promise to their target audience, according to Mark Wright, manager of the CF Midas Balanced Growth fund.

Wright and colleague Simon Callow took over management of their fund in July of last year and have conducted an overhaul of its holdings to reduce its Beta to equities. 

"We’re trying to lower the volatility of the fund and offer the genuine diversification that clients want and that often isn’t what they’re being offered," he said. 

Data from FE Analytics shows that the Beta of the fund to the FTSE 100 has decreased significantly in recent months. 

Wright has asked for the fund to be judged on its performance since January, and our data shows the fund’s Beta since then to the index is 0.27, in the lowest quartile of the IMA Mixed Investment 40-85% sector. This suggests the performance of the FTSE 100 contributed only 27 per cent to the performance of the fund. 

This compares with a figure of 0.50 for the period between January 2011 and July of that year, when the management of the portfolio changed. 

The equivalent figure for the average fund in the sector is 0.35 for the first eight months of this year and 0.48 for January to July 2011, suggesting that the fund has decreased its Beta more than its peers over the past year. 

Performance of fund vs sector and index in 2012



Source: FE Analytics

The portfolio has also outperformed its sector average and the FTSE 100 in the year-to-date, according to data from FE Analytics.

In the search for diversification, Wright and lead manager Callow have retained only 40 per cent of the holdings that were present when they took over, and have picked some alternative investments. 

Top-five holdings

Size ranking	Holding
1	DB X-Trackers FTSE 100 Short
2	AJ Bell Holdings
3	Royal London Sterling Extra Yield Bond
4	Nordea Norwegian Bond
5	New Capital Wealthy Nations Bond

Source: FE Analytics

A short position on the FTSE 100 is the fund’s top holding. It also has an ETF that rises in value when the volatility of markets increases. 

Large holdings in a Norwegian bond fund and another that invests in creditor nations are intended to reduce currency risk, while the managers also invest directly in UK stocks.

"Firstly it’s cheaper to invest directly, but the main reason is that it helps us to control the overall risk in our fund as we know the UK market well," Wright explained. 

He says companies with exposure to the population and consumer booms in emerging markets are particularly attractive within the UK market and he highlights aircraft-part manufacturer Senior as a firm he likes. 

Wright and Callow split their holdings between UK equities, ex-UK equities, fixed interest investments and alternatives – such as derivatives, property and cash. 

Although they set no targets for the breakdown, the current distribution is around 25 per cent in each and has been moving in a reasonably restricted range. 

Wright says that he and Callow are moving tentatively back into riskier assets after taking a defensive position in the first half of the year, as they think markets are too pessimistic. 

Although he believes the global economy will see sluggish growth for years to come, he thinks that the fear of riskier assets is overblown.