Diversification is a widely grasped financial concept by investors worldwide and this can be easily achieved through investment funds, which hold several number of different underlying positions. The notion of core-satellite investing is quite simple: maintaining a stable core holding whilst adding smaller satellite positions to spice up the portfolio composition. Apart from enhanced diversification effects, this concept also delivers a risk-managed exposure with the added benefits of above-average returns.
The concept of core-satellite portfolio can be applied to direct investments in individual bonds and/or equities or indirectly through investment funds. The latter generally provide greater diversification benefits, professional management and immediate action to time sensitive events. At the initial stages of setting up a core-satellite portfolio, investors should primarily select bonds, equities or investment funds that suit their predominant investment objectives. In other words, the core holding, ideally representing a substantial amount of the total portfolio, should be made up of investments in line with the investor’s risk tolerance levels, preferred asset class and distribution type. Does the investor, prefer bonds to equities or income distributions to capital gains? The answer should be used as a guide to the selection of the core investment. The greater the percentage allocated to the core, the more the portfolio’s performance will replicate the performance of the markets or investment funds in which the core holding is invested.
In a portfolio context, the selected satellite holdings add up to remaining portion of the total portfolio value and can be made up of a number of different holdings to increase diversification. Prior to selecting the satellite holdings and in order to take full benefit of this investment approach, investors must consider investments that differ from the core holding. By investing in different assets and investment strategies, investors benefit from an added level of diversification. Satellite investments are generally used to enhance the portfolio return through opportunities within the selected markets.
The Business Observer, 10th September 2015