Core - Satellite Investing
29th September 2015
Core satellite investing is a proven investment strategy that applies academic research in a real world application - Vanguard.
Constructing an investment portfolio with a stable - long term core investment and a periphery of more specialist (or spicy) holdings can have numerous advantages.
- It allows you to spread risk between a greater number of holdings
- Enables you to opt for multiple investment strategies
- It can help you decrease the degree to which the portfolio experiences market ups and downs
- It can be used to help reduce investment costs
- It can offer the potential to outperform the general market
The core satellite approach builds upon the concept of asset allocation - which put simply, means investing in a broad range of assets to meet your overall objectives.
Academic research has consistently shown that over the longer term, asset allocation determines the greatest element of a portfolios return. Picking individual assets or trying to time the market have limited influences, especially over the longer term.
The approach can also help reduce the correlation between the assets within the portfolio, this again aids diversification and can help reduce the portfolios overall risk.
What's in the Core Satellite?
In a traditional core satellite structure the core investments tend to include lower cost long term investments, such as mixed asset passive and managed investment funds. The idea behind the core element of the portfolio is to provide diversification whilst reducing risk, volatility and portfolio costs.
The Active Approach
Active managers aim to outperform the market or benchmark by drawing upon their knowledge & skill to analyse the investment options for the fund. They can also adjust the funds underlying holdings to reflect the market conditions, thus taking a more defensive position in market downturns. This can be achieved by reducing the equity content within the fund, or avoiding individual assets classes, sectors (like the banks) or countries that they feel may under perform.
The Passive Approach
Index funds, or passives as they are otherwise known aim to replicate the returns of a particular index or benchmark, by tracking its performance over time. They do so by investing in the same securities within the index, or a representative sample if it, in order to track its performance.
As passive funds do not require the level of research and analysis that accompanies their actively managed counterparts the charges associated with them are typically lower. Index funds can also reduce the portfolio turnover rates as they tend to hold onto the underlying assets for longer - this again reduces costs and portfolio performance drag.
Combining both in one portfolio
By combining both approaches within your core holding you get the benefit of both worlds. Active funds that are trying to outperform the benchmark, with the passive elements providing the lower cost returns that are more closely aligned to the actual benchmarks return.
The relative sizes of the core satellite funds will depend on your investment objectives, individual circumstances and risk profile.
This is where we can help you with the construction of your own portfolio.
A powerful investment strategy
Active or Specialist Index funds as your satellite?
The satellite provides an opportunity to supplement the core with actively managed or specialist index funds - Vanguard
Actively Managed Satellite funds
Actively managed funds aim to either outperform the market average by beating a selected index (for example the FTSE 100) or, achieving a specific objective (RPI +3%).
Calling on their knowledge & skill the managers analyse the market and buy/sell assets they believe have the potential to increase the funds return. They may also look to take defensive measures in an attempt to avoid potential losses by filtering out certain equities, countries or industry sectors that they believe will under perform.
Active fund managers also have a great deal of choice and come in a wide range of specialist styles. Markets, sectors and geographies - offering the investor an infinite choice for diversification. Ethical investments or Socially Responsible investments can also be accommodated using actively managed funds.
Passively Managed Satellite funds
In addition to the typical index tracker fund, some investment firms offer funds that track specialist markets or sectors for example technology, mining, oil and gas. These specialist markets may include emerging countries, industries and fast growing economies. By holding investments in different sectors you aid diversification & therefore help reduce the risk of the overall portfolio.
Which approach is the most suitable for you? Well that is where we can help you. Call us now to discuss your personal objectives and see how a core satellite portfolio could help you achieve your goal.
Implementing a Core Satellite Portfolio
Like any other investment portfolio, core satellite portfolios can be as cautious or as adventurous as required in their approach.
The mixture of investments, management styles and sectors must be aligned to your individual objectives and the risk you are comfortable taking. We can talk you through the process ensuring you understand what you are investing in, how it works, how much it costs and the risks associated with it.
We will help you consider:
- The asset allocation, which will be tailored to your attitude to investment risk.
- The asset allocation between Core & Satellite.
- The mixture of active and passive funds to be used.
- The specialist sectors to consider for your satellite element of the portfolio.
Once in place our ongoing review process will help you manage the investments over the longer term, adjusting the portfolio over time to ensure it remains suitable and relevant to your personal circumstances.
To find out more please contact us to arrange a no obligation initial meeting and see how we can help you plan for your future.
Adam Caga