At risk of the effects of 'diworsification'

"There is no need for income," says Leslie. "My pension and my wife's earnings from property rental are sufficient to cover our total expenditure. Hence I've been slowly switching from income to accumulation units whenever those are available. My choice of income funds is based on the assumption that they will produce growth as well, so with deposit accounts yielding 0.5 per cent to 1 per cent that should give us capital protection.

I would say that my attitude to risk is seven, on a scale of 0 to 10, and I take a global view rather than just focusing on the UK.

My last three trades were buying Woodford Patient Capital Trust (WPCT) when it was trading at par, buying Neptune Japan Fund (GB00B3Z0Y815) in May and selling Newton Asian Income Fund (GB00B8KPW262) in June.

On my watchlist I have Worldwide Healthcare Trust (WWH), and Comgest Growth Emerging Markets (IE0033535182), First State Asia Pacific Leaders (GB0033874768) and Fidelity SE Asia (GB00B6Y7NF43) funds.

Leslie Hughes' portfolio

Source: Investors Chronicle. Price and value as at 22 October 2015.

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Your belief that funds will offer some capital protection in an era of low cash returns is a dangerous one. Deposit rates are low because central bankers around the world believe that the world economy is too fragile to allow rates to rise. Such fragility means that equities are risky.

Granted, central banks might be overly cautious, in which case equities would do well as economies strengthen. But this view is not the same as believing that equities are safe - and they are not. We should not regard low interest rates as a reason for holding equities, but rather as a sign that returns on financial assets generally will be low on average.

This is especially true of your portfolio, which is weighted towards emerging market funds. These carry two risks. One is simply that they are more volatile than developed economy equities. The other is growth rate risk. It's possible that China's slowdown will be not temporary but rather the start of a transition to a permanently lower growth rate. If so, emerging markets generally might see a permanent derating, partly because they will be hit by weaker Chinese demand and partly because they will be tarred with China's brush: pessimism on China will spill over to other emerging markets.

In this context, I fear this portfolio isn't as well diversified as you believe.

Think about what happens when you add one fund to another. But, on the one hand, you weaken the impact on your portfolio of that fund's individual performance: a single star fund manager will make less contribution to your total returns. But on the other hand, you increase the importance in your portfolio of the common factor driving funds' returns. This common factor is the global market. In holding 46 different funds you are, in effect, holding something like a global tracker fund with added exposure to emerging markets.

Now, there is nothing wrong at all with a global tracker - it should be the basis of everyone's portfolio. But you are holding a very expensive tracker simply because you are incurring the fees of active managers. I'll concede - if I must - that it's possible that a few managers do justify their fees by delivering above-par performance. But how likely is it that all the managers of your funds will achieve this? What's more likely is that you are diluting the impact of one or two good fund managers' returns by holding so many.

In the long run this could be an expensive mistake. Let's assume that a low-cost alternative to this portfolio, comprising emerging market and global equity exchange-traded funds (ETFs), returns 5 per cent a year after fees. An extra one percentage point of fees then gives you a return of 4 per cent. Over 10 years, this difference costs you £150 for each £1,000 invested in the higher-cost funds. For you, this is equivalent to almost £25,000 after 10 years.

Danny Cox, chartered financial planner, Hargreaves Lansdown, says:

You have 46 holdings with an average size of £3,500 per holding. 24 of these are emerging market, Asian or Japanese funds.

The next biggest market exposure is Europe, and the UK is a relatively modest component of your portfolio, which is unusual for a UK investor.

There is a considerable exposure to and concentration on higher-risk, longer-term growth markets where the volatility will be much higher than with UK-based funds. You could be rewarded over the longer term, although it will be a bumpy ride along the way.

Although risk is in the eye of the beholder, if I used a numbered scale out of 10 I would not rate this portfolio as a seven. It is probably nearer eight-and-a-half. This strategy may not be what you have in mind, although with income meeting your needs from elsewhere, and assuming you have a decent cash reserve, you can afford to take this level of risk.

Alan Steel, chairman, Alan Steel Asset Management, says:

I don't know how much your home is worth, or whether you have children or grandchildren who could incur inheritance tax. If you die first, and there is a fair chance of that, I don't know whether your pension income will continue, halve or disappear. And should you die first, I don't know if your wife will want to continue holding all these funds.

My experience is that not enough thought is given by keen investors with a myriad of holdings as to what will happen if they die before their partner, in terms of the mess created in the winding up of the estate, the costs involved and the decisions left behind.

It's not obvious if the holdings are held inside a platform structure that would reduce costs. There's no indication as to whether or not the funds are inside individual savings accounts (Isas). It would be more tax-efficient if the funds were switched yearly into Isas, taking advantage of your annual capital gains tax allowances if necessary (this is currently £22,200 for a couple).

You are not interested in income from the portfolio. However over the past 20 years, particularly with regard to funds focused on the UK stock market, there's little evidence that growth funds have outperformed income or value funds - indeed it's the reverse.

HOW TO IMPROVE YOUR PORTFOLIO

Chris Dillow says: I would suggest you consider reducing fees by replacing some funds with ETFs. Many would also advise you to consider reducing portfolio risk by holding cash or bonds, and they have a point. A zeroish real return might be pathetic, but it's a lot more palatable than big losses, which are quite possible in emerging markets.

However, as you aren't dependent on this portfolio for living expenses, and as you seem risk-tolerant, perhaps you can withstand this risk. And remember that we are now at that time of year when taking equity risk usually pays off. At least this reduces the urgency of the need to consider shifting to safer assets.

Danny Cox says: In terms of the number of holdings, 46 is far too many. Apart from being a large number to manage, research and review, there is the potential for overdiversification or 'diworsification' - where a portfolio is spread so thinly that any outperformance is too small to be noticeable.

For a portfolio of this size, 15 to 20 funds will provide sufficient diversification and still give you exposure to specific markets. For many investors, emerging markets allocation is often best obtained through generalist funds where the manager can vary the companies and markets strategically and tactically to provide the best opportunities.

It's clear that you do not need income. However, by selecting accumulation units you are not giving yourself the opportunity to switch to taking income in the future should you need to. Your penchant for growth investments reduces the amount of dividends that could be collected and reinvested, and reinvested dividends can be the source of considerable compounding of profits. If the portfolio is held within an Isa wrapper you do not need to worry about the tax implications of income.

You already hold one of the funds on your watchlist and I would much rather see you add to existing holdings than add a further three to the list. Investing in emerging markets should really be done on a 10-year-plus view, so you should be comfortable with this timeframe.

Alan Steel says: You have 46 holdings! And all in funds, each of which will probably contain on average at least 50 stocks. A number of these funds are worth less than 2 per cent of the portfolio total so performance will be diluted massively.

I have no idea when the majority of the funds were purchased or why, but have a suspicion you have been buying past performance because you were attracted to success stories late in their cycle. Surprisingly, little is exposed to the best major stock market over the past five years, the US.

We did an analysis of the performance of the portfolio over one and three years, missing out the funds with a record of less than three years. We found that this portfolio over the past three years, and even the last difficult six months, almost exactly matched the Investment Association Global sector total return average of 31.94 per cent. So swapping all these holdings for Vanguard FTSE Developed World ex-UK Equity Index Fund (GB00B59G4Q73) with an ongoing charge of only 0.15 per cent would make sense on almost every count.

Or if you don't fancy settling for the average, tighten up the portfolio, drop the number of holdings to around 10, add greater weighting to the better quality funds and attempt to harvest the outperformance that's already there. I would also highlight your huge underexposure to the US, the overexposure to Europe and the stock overlap between the Asian funds.

If you want to continue aiming for growth and a low income yield you should consider upping exposure to good-quality small-cap managers, focused on the UK and globally. Finally, make your lives easier by switching into Isa wrappers inside a platform structure. One day the marriage survivor will appreciate the benefits.

*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.

Want to see your portfolio analysed by the experts? Email: moira.oneill@ft.com