InvestSMART

Talking Strategy: Structuring your investments using a Core-Satellite strategy

Core-Satellite investing allows you to blend strategies, it allows for you to make your own investment decisions whilst lowering or increasing your exposure to risk and/or volatility.

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17 Aug 2020 · 6 min read

We constantly get questions about investment and/or portfolio ‘structure’.

  • Should I be invested in bonds?
  • Do I need international equities?
  • Should I chase growth over value?
  • What level of exposure should I have to listed property?

We could go on but if we boil it down, the questions are really asking one thing:

How do I structure my investment monies to suit what I want to achieve?

There are numerous approaches to creating an investment ‘structure’, all have strengths and weaknesses. It is why, we at InvestSMART, offer an array of diversified portfolios that fit most of the investment structures people need, from conservative through to high growth set ups.

However, we also know that these portfolios are a ‘one size fits all’ idea and that some tailoring is needed to achieve your specific goals and investment strategies.

Therefore, one strategy that can accomplish a combination of investment structures is the ‘Core and Satellite’ strategy.

Core-Satellite investing allows you to blend strategies, it allows for you to make your own investment decisions whilst lowering or increasing your exposure to risk and/or volatility.

Setting up a Core-Satellite strategy

Core component:

Your core holding should be a low-cost diversified set of holdings that meets your long-term core goals.

For example: The Balance Portfolio has 52% exposure to growth assets consisting of domestic equities, international equities and listed property holdings. The other 48% is defensive assets consisting of domestic and international fixed income and cash.

Your core component should be focused on:

  • Reducing volatility across your total portfolio by spreading your risk
  • Reducing the ongoing costs of your portfolio
  • Meeting your long-term investment goal

Your core component then is filled with holdings that are unlikely to be turned over and provide a ‘base’ setting for your overall portfolio.

 

Satellite component(s):

Satellite holdings are ‘flexible’ with specific investment structures and strategies.

For example: The International Portfolio is specifically designed to give investors exposure to international equities above and beyond what is achieved in their core holdings. Investors use this portfolio to try and outperform, as international equities have consistently outperformed Australian equities over the past 20 years, and, therefore, want to increase their overall exposure to the possibly higher returns that can come from international equities.

Satellite setups may also include special ideas like a basket of tech or high growth stock. It could even mean adding a basket of fixed income products like hybrids or treasury yields to their overall holdings. It also means they may hold several different satellite components at once like the International Portfolio and actively managed Growth Fund.

In short, ‘Satellite’ holdings add some dynamism and flexibility to your investment strategy and achieves the goals of:

  • Taking a more assertive position with your investment without risking your entire investment fund
  • Possibly outperforming the market
  • Possibly increasing the protection in your portfolio
  • Taking a more conservative position during times of heightened uncertainly

 

Using the core-satellite strategy is a good way to provide that level of flexibility one needs in a dynamic investment world. The strategy also allows for a more ‘tailored’ investment structure to fit your person scenario rather than you trying to fit into a board four-type risk profile.

For more information on our portfolios please click here.


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