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By Trish Harding

What is Core and Satellite Investing

When building an investment portfolio, Sterling Planners believe the simplest design happens to be the best. In this update, we introduce the basics of portfolio construction with a design called ‘core and satellite.’ Like many of the best investing strategies and philosophies, core and satellite is simple and effective, especially for long-term superannuation portfolios.

Definition of Core and Satellite Portfolio

Core and Satellite is a common and time-tested investment portfolio design that consists of a “core” investment, such as a “blue chip” share fund, which represents the largest portion of the portfolio. The other types of funds — the “satellite” funds, each represent a smaller portion of the portfolio to create the whole.

The primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in different baskets) while outperforming (obtaining higher returns than) a standard benchmark for performance, such as an index. In summary, a Core and Satellite portfolio will hopefully achieve above-average returns with below average risk and volatility.

Begin with the Core

Using shares (Australian & International) as an example, the best core holding is a diverse large-cap share fund. At Sterling Planners we use Listed Investment companies (LIC’s), Exchange Traded Funds (ETF’s) and Index funds to achieve this. The core will represent the largest portion of your portfolio.

The reason large-cap funds work well as core holdings is because information about large companies, such as; ANZ, BHP, Apple and Microsoft, is so readily available to the public, that it is extremely difficult for active investment managers to gain an advantage on other investment managers, thereby consistently out-performing the market returns, especially over long periods of time.

In other words, if even the pros have a difficult time beating the returns from the “blue chip” companies, why should an actively managed fund do any better?

Add the Satellites

After purchasing the large-cap core, different types of funds — the “satellites”—representing different fund categories will complete the structure of the Core and Satellite portfolio.

These other funds can include; mid-cap, small-cap and emerging markets shares, along with other actively managed investments where we believe the fund will add incremental returns to the portfolio. These satellites are the funds that will help the portfolio to obtain higher returns than the benchmark (index), with lower volatility.

At a minimum, and perhaps most importantly, the Core and Satellite portfolio construction design can help insure our clients are well diversified across different asset types (shares, property, fixed interest) and different fund categories.

As per the benchmark comparisons below, this core and satellite approach has consistently provided Sterling Planners competitive returns for less than average risk.  Please note the Sterling Planners portfolio (orange) represents a ‘Balanced’ risk profile.