Core-Satellite Strategy

One of the most popularly adopted investment strategies is what is usually termed the Core-Satellite Strategy. It has been designed to provide a portfolio with stability, but at the same time, its objective is to achieve high returns through satellite investments. Essentially, the strategy balances risk and return by mixing a low-risk, broadly diversified core with a selection of more dynamic satellite assets. The meaning, how the strategy works, and its importance in building a resilient investment portfolio will be reviewed in this blog for the core-satellite investment strategy. 

What is the Core-Satellite Strategy?

The Core-Satellite Strategy is an investment methodology in which the portfolio is divided into core and satellite. The core is composed of a stable, diversified, long-term investment that forms the foundation of the portfolio. These are usually large, broad-based market indices or low-cost funds. They should be held as long-term consistent return generators. 

The satellite part is composed of smaller, more aggressive investments meant to enhance the portfolio’s performance. These include sector-specific areas, regions, or alternative assets such as hedge funds and individual stocks. While the core provides stability, the satellite offers growth opportunities through tactical, higher-risk investments. 

Understanding Core-Satellite Strategy 

In sum, the core-satellite approach balances risk management against the possibility of higher returns. Such a diversified portfolio will increasingly be prepared to face up to or stand against various market fluctuations, considering that its core is made of long-term and very stable investments. The satellite part allows room for flexibility in trying to capitalise on market trends or investing in higher-return assets. 

This strategy appeals to conservative and aggressive investors alike because it achieves a customised risk level. The core portion mitigates risk by keeping a majority of the portfolio in stable investments while offering the satellite portion to capitalise on short-term market movements. 

Core Portfolio Construction

The core portfolio forms the base of the core-satellite strategy. It is a means of providing broad market exposure with a stable base. The core portfolio will focus on long-term diversified investment, low cost, and less management involvement. Core investments may take the following components: 

1. Broad Market Index Funds: These are low-expense funds representing a broad market index. They diversify across multiple sectors, making them a common choice for the core portfolio.
2. Exchange-Traded Funds (ETFs): ETFs on large market indices are another popular choice for the core. They are liquid, low-cost, and easy to manage within the portfolio.

3. Fixed-Income Securities or Bonds: Most core portfolios would cover a few government bonds or other fixed-income instruments that produce regular income with relatively low risk.

The core should occupy the bulk of the portfolio, say 70-90%, depending on the investor’s appetite for risk. It should be a sound foundation that naturally evolves through time and needs few composition changes. 

Risk Management 

One of the biggest advantages of the core-satellite strategy is effective risk management. By anchoring the portfolio with a stable core, the overall level of risk stays in check even if those satellite investments happen to be highly volatile. The following is how one manages risk in a core-satellite portfolio. 

1. Diversification: This usually means that the foundation is well diversified across sectors, regions, and asset classes. This reduces dependence on any single market-related risk.

2. Volatility Control: The satellite investments are higher in risk but constitute only a small portion of the overall portfolio. This limits market fluctuation and prevents speculative investment losses from becoming overwhelming.

3. Flexibility: The satellite portion can be changed to reflect prevailing market conditions, enabling investors to exploit growth opportunities without exposing too much of the whole portfolio to risk.

The important point is that investors can achieve an overall fit with their risk tolerance and investment objectives by maintaining an appropriately diversified core and then making selective satellite investments. 

Examples of Core-Satellite Strategy 

1: Balanced Core-Satellite Portfolio 

Accordingly, the US investor would invest 80% in core positions, such as an S&P 500 index fund and government bonds. The remaining 20% would be invested in satellite investments, such as emerging market stocks or technology ETFs. This mix allows the core position to provide slow-and-steady returns, while the satellite investments provide the opportunity for larger short-term gains. 

2: Growth-Oriented Portfolio 

In this case, a more aggressive investor in Singapore can take up to a core 70% with regional equity ETFs and fixed-income assets. The satellite 30% can be placed in concentrated or thematic sector investments like renewable energy or REITs. Having this portfolio concentrate on growth sectors in the satellite portion can yield higher returns, while the greatest part of the investment is kept in stable core assets. 

Frequently Asked Questions