What is the Core-Satellite Investment Strategy? Beginner Friendly Guide

Introduction

Hey! If you’re here, you probably are interested in investing!

Before you move on, if you haven’t done so, we advise you to look through our “Investment for Singaporeans” mega thread, where you can find articles going through the basics to advance levels of investing.

Today, this article expands on diversification by discussing a popular approach known as core-satellite investing. Investing in stable and high-growth funds can greatly diversify your portfolio.

This blog post will introduce you to the core-satellite investment portfolio strategy. We’ll also discuss some of the benefits of this strategy and how to implement it!

Why construct a core-satellite portfolio?

There are a few reasons why you might want to consider using a core-satellite approach to investing.

First, it can help to diversify your overall portfolio. By having a mix of stable and volatile assets, you can help protect your portfolio from any potential losses that might occur if the markets turn for the worse.

Second, a core-satellite approach can also help you to take advantage of different market conditions. For example, if a specific industry is doing well, the satellite portion of your portfolio invested in the sector can help you to maximize your returns. But if the industry is struggling, the core portion of your portfolio can help to keep your losses to a minimum.

Finally, Style! Different investors have different investment styles and preferences, some might have a higher risk appetite than others. Some investors prefer a certain sector compared to another. Using this strategy, an investor can allocate the bulk of his assets into a stable core portfolio while tweaking the satellite portfolio to suit his investment style.

What is a core and satellite portfolio?

In short, a core-satellite investing strategy is an asset allocation strategy that involves investing in a mix of both “core” and “satellite” investment portfolios.

The “core” investments in a core-satellite portfolio are typically large, established companies considered relatively safe and stable. These core typically comprise the lion’s portfolio share (hence the name “core-satellite”).

The goal of the core investments is to provide broad market exposure and to track the market’s return as closely as possible, giving you, the investor, stable returns.

On the other hand, “satellite” investments are typically more speculative investments. These satellite investments typically make up a smaller portion of the portfolio and are meant to provide the portfolio with some additional growth potential.

The goal of satellite investments is to provide you, the investor, with the potential for higher returns.

How to Choose Core Funds

The core funds and core assets you select should largely depend on your investment goals.

Retirement or long-term investment

If you are young and investing for the long term, such as for retirement, you should consider a Mutual Fund or Exchange Traded Fund (ETF) that tracks an index like the S&P 500 or the Dow Jones Industrial Average. These funds offer stability and growth potential, which can help you achieve your long-term financial goals.

Short term goals

If you are investing for shorter-term goals, such as saving for a down payment on a home, you may want to consider a money market fund or other short-term investment option.

Once you have selected the type of core fund that best suits your needs, you will need to research different options to find the best fit for your portfolio.

When evaluating different core funds, pay attention to fees, performance, and liquidity. You should also consider whether the fund is actively managed or passively managed. Actively managed funds typically have higher fees but may provide better returns. Passively managed funds (such as ETFs) typically have lower fees but may not provide as high of returns.

Once you have selected a few core funds that fit your needs, it is important to monitor them regularly. This will help ensure that they continue to meet your investment objectives and help you make any necessary adjustments to your portfolio.

How to Choose Satellite Funds

Now that you have selected your core fund, it’s time to choose your satellite funds! Here we discuss a few metrics you can use to pick your satellite funds:

Investment style.

For example, you might prefer a growth-oriented strategy. In this scenario, you might want to target specific market sectors that are expected to experience high growth in the future. Examples of sector funds include funds that invest in healthcare companies, utility companies, and technology companies.

You might also prefer to invest based on market cap. In this scenario, you might consider ETFs like small-cap value and large-cap growth funds.

Risk Profile

Choose the amount of risk you are willing to take when investing. For example, if you have low-risk tolerance, you might consider investing in bonds or other income-producing assets like dividend-paying stocks and REITs instead of equities. Higher-risk investors may prefer emerging markets and small-cap stocks instead of government bonds or blue-chip stocks.

Investment goals and investment horizon.

Third, you can decide how much money to allocate to each satellite fund based on your investment goals and investment horizon For example, if you are saving for retirement and have a long time horizon (20+ years), then you may want to have a higher percentage of your portfolio invested in equity-based satellite funds since they have the potential for higher returns over time. If you are saving for a shorter-term

Satellite funds should be strategic

One essential point to realise is that satellite funds should be strategic investments. As an investor, satellite allocation could consist of higher short-term volatility assets that expect higher future performance and returns

Portfolio construction: Asset allocation in core and satellite portfolio

By now, you should have understood the approach to portfolio construction. You should build a stable core, while the satellite positions could aim for higher growth.

Here we will give a sample of how to construct a portfolio.

Step 1: Determine Asset allocation strategy

Asset allocation refers to the percentages of satellite and core allocations.

This should be highly related to age and risk tolerance.

Step 2: Choosing your core assets

Given the current market conditions and past performances of the overall market, we recommend sticking with equity as the main asset class. Because market volatility is high, it is expected to generate higher investment returns in the long run than debt instruments and other asset classes.

We recommend target asset allocation of 70-80% in equities and 20-30% in fixed-income instruments for young, high-risk invidiously who do not have a large sum of cash.

An example fund you could possibly invest in will be:

Global Equity funds or ETFs such as:

• S&P120AQR Global Equity Fund Class I
• MSCI World Index

Income Funds can include:

• iShares Interest Rate Hedged High-Yield Bond ETF (HYGH)

Step 3: Choosing your satellite Assets:

Remember, your satellite assets could be more volatile and be tailored to your investment preferences and style.

We recommend that satellite assets could include sector or region-specific funds.

You can consider the following:

• Global Tech Fund: If you believe in the growth of technology companies
• Sustainability Fund: If you believe in the growth of companies with good ESG practices
• China Fund: If you believe in the growth of China Funds
• MSCI Emerging Market Fund: If you believe in developing countries

Pick a few funds that align with your style and goal, and you’re good to go

Step 4: Complementing with another strategy

So, by now, you’ll have quite a diverse portfolio allocation. But s question still remains,

1) What purchase strategy are you using? Lump sum or Dollar cost averaging (drip feed).

If you do not have time to monitor or want to be safe, we recommend dollar cost averaging. Using dollar cost averaging, you take emotions out of investing! Learn more about how you can use dollar cost averaging here!

2) Are you going to stock pick or go with funds

This question pertains to using active or passive funds or stock pick. Suppose you do not have time to constantly monitor the market and make strategic decisions. In that case, it is recommended that you stick to active/passive funds rather than “stock pick” individual assets.

Read more about actively managed funds and ETFs here!

Step 5: Executing your purchase

Now the final step is actually to buy the funds or assets. As a retail investor, you might want to open a brokerage account to get started immediately. However, we urge you to consider your expertise. If you’re new to this, we likely suggest that you speak to your financial consultant to discuss possible solutions.

Retail investors like yourself often would not have the time or market insights to adjust your satellite portfolio based on market trends. Hence, you might want to consider engaging professional advice.

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Conclusion: Get started today!

A core-satellite investment strategy is a good strategy to diversify your portfolio. However, due to the complexities involved, it is not for beginners. Speak to our expert today, who will help you craft a personalised strategy!

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More: Find out more about investing 

Find out more about the different strategies for investing in our mega-thread here!