What is a Core & Satellite Portfolio?

There are many styles of portfolio you can build for yourself. The style of your portfolio can reflect your risk tolerance when it comes to investing. With a core & satellite portfolio, you have a slightly higher than normal risk tolerance, this is because the addition of individual stocks is used to have a potential edge on the overall market while having the majority of your portfolio in an index fund.

what is a Core & Satellite portfolio?

The Core & satellite investing method was created and designed to minimize costs, tax liability and volatility while providing the opportunity to outperform the stock market.

The core of the portfolio consists of passive investments that track major indices such as the Standard and Poor’s 500 index (S&P500) or an All-world index tracker. Additional positions (Satellites) are added to the portfolio which is actively managed investments such as individual stocks or specialized funds.

Answering a question

The benefits of the Core & Satellite portfolio

  • Spread risk – increases your overall number of stocks and bonds
  • Benefits of a variety of investment strategies e.g. active and passive
  • Reduced volatility by having greater diversification
  • Reduced costs – using passive funds/ETF as core holding means less dealing for the satellite positions
  • Provides the potential to outperform the market –  using satellites to increase the risk but also reward

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The Core

The Core of the portfolio is what provides this strategy with broad exposure at a low cost. As said the core is usually larger than the satellite, forming the majority of the overall portfolio. The Core normally represents somewhere between 60-90% of the portfolio, this changes between investors as you have to balance the portfolio to suit your risk tolerance.

Well understood, developed markets offer the best core holdings. This is due to them offering lower risk to groups of investors. This makes a diversified portfolio of tracker ETFs ideal.

Some of the ETFs which can be selected to create a core could be as follows:

VWRP/VWRL – Vanguard all world Index tracker

VUSA – Vanguard S&P 500 

VUKE – Vanguard FTSE 100

VMIG – Vanguard FTSE 250

IEUX – iShares Europe ex-UK

The Core can be created by a mix of multiple diversified ETFs and setting the percentage of each Core holding or simply one holding which represents your whole core holding. 

The Satellites

The satellites added to the strategy are what allow the investor to have the opportunity to outperform the total market by picking individual investments or specialized funds. 

Satellite holdings can be chosen in a number of ways.

  1. They can offer more aggressive exposure to the same assets in the core.
  2. They might include niche assets, geographies or themes which don’t form part of the core.
  3. They might offer alternative active strategies compared to passive core.
  4. Satellites can be used to involve smart beta or strategies to outperform

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There is no true limit on the number of holdings to cover the satellite side of this strategy. Their key goal is that the satellites should imperfectly correlate to the core and offer higher performance under anticipated market conditions or towards a specific goal.

When market conditions change, action can be made by the investor in the satellite portfolio by hedging or moving cash to allow the core of the portfolio to be untouched & unchanged.

Some examples of satellites could be the addition of some of your favourite company stocks, stocks which are in a sector which you believe will outperform, funds which offer a more active investment strategy or funds which have more specialized goals or investment geographics.

NameTickerReason
The Coca-Cola CompanyKOFavourite beverage maker
Microsoft CorpMSFTUse their computers
Greencoat UK WindUKWA fund which invests in renewables
The City Of London Investment TrustCTYA fund with income & growth goals (FTSE all share index)
iShares Global Clean EnergyINRGAn ETF investing in clean energy
VanEck Vectors Video Gaming & esportsESPOAn ETF investing in video gaming and eSports.
Vanguard Emerging MarketsVFEMA ETF gives exposure to emerging markets such as China, Taiwan and India

*This list is an example and should not be taken as investment advice.

This list shows how diverse you can create these satellites. From specialized ETFs giving you diversification across a sector to your favourite stock, there isn’t a limit to the type of investments which you can use to increase exposure to a certain industry or market

Selecting the right portfolio style

Rebalancing

Like most portfolios they need rebalancing, the frequency of rebalancing varies and comes down to the investor themselves, though it’s quite common to rebalance yearly. 

The reason, especially for the Core & Satellite portfolio, is that in a particular year one of the others (Equities or Bonds) may have a very good year in terms of returns.

If either one starts representing a far bigger percentage of your portfolio than allocated, you could end up with a portfolio weighted towards one asset. This will leave you with a greater risk exposure than you may like.

 

If curious about how or when to rebalance your portfolio check out our article which goes into more information.

When to Rebalance your Portfolio

Summary

The Core and Satellite portfolio style is a brilliant style of portfolio for those types of investors who wish to try and outperform the market without taking on too many risks.

Having the balance between Index funds and individual stocks is key to keeping your investing risk tolerance low with the benefit of potentially having better returns than the overall market.

If this style of portfolio interests you then check out the types of accounts you can use the Core & Satellite portfolio style in by checking out our article on the 4 types of investment accounts.

4 types of Investment Accounts

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