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Does a core and satellite strategy still work?

Written and accurate as at: Apr 27, 2020 Current Stats & Facts

A core and satellite investment strategy is still relevant in today’s investment market. The core portfolio provides the beta a client needs to provide a market return with diversification across a variety of asset classes, while the satellite portfolio provides some flexibility and an opportunity to capture market alpha. Allocating your capital across different funds also provides some extra liquidity and control.

Like other types of investing, you need to have a long-term view. It’s important you view the satellite component of the portfolio as a way to diversify and take a position on particular industries or companies without exposing your whole portfolio and losing sight of your long-term wealth and retirement goals.

A core-satellite strategy can also have lower management fees and be more tax-efficient than having all of your capital invested in an actively managed fund. For example, if you swap active managers and you only have 5 per cent of your portfolio in an active fund, the transaction costs and potential capital gains tax would be much lower than if a larger proportion of your portfolio were actively managed.

If so - which satellites and how should the core be structured?

Your core and satellite portfolio should capture the major movements of the wider market, plus allow you the opportunity to capture moves in specific industries or companies. Generally, the core component will be held in low-cost index funds or exchange-traded funds (ETFs). The satellite component will be invested in actively-managed funds or specific securities.

For example, you might want 70 per cent of your portfolio to be invested in global equities. With a core-satellite portfolio, you’d potentially allocate 50 per cent of your funds to one low-cost equity ETF (core) and 20 per cent across four actively managed funds (satellite). The other 30 per cent of your funds may be allocated across low-cost cash and fixed income funds.

Anything else?

Asset allocation is arguably more important than timing the market or stock picking, so it’s important you get it right. For the satellite component of your portfolio, in particular, make sure you get specialised advice and do your research to find a fund manager who has a strong track record, extensive experience and knowledge.

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