I couldn’t find a thread specifically on core-satellite investing, so I wanted to start a discussion. I’m sure many people here use this strategy in some guise and others could benefit from it too.
For those who are unfamiliar with the concept, core-satellite investing seeks to capture the best of both passive and active management.
Some detailed guides are linked below but this picture summarises it neatly:
Using my own portfolio as an example, I currently have roughly 65% in passive all-world trackers. The rest is in investment trusts which I use as active satellites: eg SMT for growth, JGGI for income, MWY for quality, HVPE for private equity, JMG for emerging markets, NAS for small caps and ATT for tech.
I prefer trusts for the active element due to the opportunity to buy them at a discount to NAV and gearing which should amplify long-term returns, but you can use ETFs instead.
Here are some of the advantages of this strategy as I see them:
Cost: Some of the trusts above have hefty 2%-plus ongoing fees but the passive core reduces the weighted ongoing cost of my portfolio to around 0.40% in total, which I think is great value.
Volatility: A big chunk in passive trackers should lower volatility. You could add satellites to gain exposure to assets, eg gold or bonds, which perform better in different conditions.
Beginner Friendly: This strategy can be forgiving if, or rather when, you get something wrong. I’ve been investing for more than 15 years and still have lots to learn, so I think of the passive core as a hedge against myself. As I gain experience, I’m gradually increasing the active element towards 50-60% and, eventually, I may add a handful of individual stocks to the mix.
Diversification: You can get passive exposure to most things nowadays but active investments offer a wider array of options, such as direct exposure to renewable energy projects. Closed-ended funds are also a better vehicle for less liquid holdings like private equity.
Performance: While you could under or outperform with this strategy, a passive core will at least guarantee that a big proportion of your portfolio achieves the same return as the broader market. Active management could also be preferable in certain circumstances – such as for small caps and emerging markets – where, in theory, inefficiencies make it easier to beat the market.
I think the biggest problem with core-satellite investing is that your portfolio can become complex and, if you’re not careful, you could end up with a relatively expensive, quasi-tracker which underperforms.
However, I think this can be negated by keeping costs in check as well as planning exposure to different assets, sectors, managers, factors, geographies and underlying companies.
You can also mitigate this risk by seeking out a relatively high ‘active share’ from your satellites, ie minimising overlap with core investments or other indices.
All in all, I’m a big fan of the flexibility this strategy provides to strike a balance between passive and active approaches. As with many other things in life, I think the middle path is often best.
What are your thoughts on core-satellite investing? Have I missed any of the major pros or cons? How do you implement it within your own portfolio?