There are many ways to build an investment portfolio, but one commonly used method is the ‘core/satellite’ approach.
The name is a reference to the structure rather than the type of investments. It broadly means that the portfolio will have a large amount invested in some core areas and then a number of smaller investments in other, usually more niche, things – the satellites.
How to use a core-satellite investment strategy
There are different ways to approach this strategy.
It could be that the core of the portfolio is invested in lower risk funds, which are complimented by some smaller investments in higher risk investments, like individual shares.
Or it could be that the for a UK-based investor the core is UK assets and the satellite is some overseas investments.
Perhaps the core of the portfolio is invested to provide an income, while the satellites are there to generate some capital growth.
One of the advantages of this approach is that it encourages diversification and has the potential to reduce the overall correlation of an investment portfolio.
For many investors, the core of what they want to invest in is fairly clear to them.
It’s likely dependent on time horizon, capacity for loss and whether the investor needs income or not.
Sometimes though it can be more challenging for individuals to consider what satellites would be suitable for their portfolio as these are, by nature, more specialist and often higher risk.
3 satellite fund ideas to add to a portfolio
Here are three funds that can bring quite specific investments and add diversification to a portfolio.
Investing in these funds and investment trusts isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of an investment before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each investment, it’s risks and charges please see the links to their factsheets and key investor information below. This article is not personal advice or a recommendation to buy or hold any particular investment. If you’re unsure what’s right for you, please ask for advice. Investments go up and down in value so you can get back less than you invest. Income varies and is not guaranteed.
A higher risk shares option – Jupiter India
Not only does India currently have the largest population of any country in the world, but it also has one of the fastest growing economies.
While the impact of tariffs remains uncertain, India looks well positioned compared to many other Asian countries, which could act as a tailwind in years to come.
At the same time, the government has introduced monthly savings plans that allow individuals easier access to investing in their stock market.
These tailwinds have been positive for the Indian stock market in recent years and it’s possible they’ll continue for some time yet.
However, as with investing in any individual emerging market economy, you can’t ignore the potential for political or regulatory changes.
These risks arguably make an investment in the Indian stock market more suited as a satellite holding.
Note that MSCI World and FTSE World don’t include any investments in emerging markets (unlike MSCI All Country World and FTSE All World which do). It’s therefore possible that investors don’t have much of their portfolios in Indian companies.
And for those who like to invest in individual companies as well as funds, it’s unlikely that picking Indian stocks is an area of specialism for the average UK investor.
This makes a fund like Jupiter India an attractive proposition as a satellite investment.
It’s managed by Avinash Vazirani who began his investment career in 1994 and has largely focused on the Indian stock market ever since.
It could be a good addition to help diversify a portfolio that’s focused on developed market investments, but also give access to an economy with a number of tailwinds behind it.The fund invests in a single emerging market as well as smaller companies, both of which are a higher-risk approach.
The manager also invests in companies with high Environmental, Social and Governance (ESG) risk scores and have a higher weighted average carbon intensity compared to most funds that we have under coverage. This means the fund could be at risk from regulatory changes or future environmental issues.
An income option – Artemis High Income
An investment portfolio focused on growth is unlikely to have much invested in bonds (if anything). This is because, broadly and over the long term, it’s expected that company shares will provide a higher return than bonds.
But having something in an investment portfolio that provides an income can be useful.
Firstly, it acts as a diversifier, meaning that the investment focused on income might hold its value better during a period of stock market stress.
Secondly, the income received can be reinvested, either in the asset that’s providing the income or in something else entirely.
When it comes to investing for income, an obvious place to start is bonds. Company shares typically pay a dividend that’s smaller (as a proportion of the amount invested) than bonds do. And when it comes to bonds, broadly speaking, the higher the level of income, the higher amount of risk associated with the bond. This applies whether investing in individual bonds or bond funds.
The Artemis High Income fund is aptly named – its focus is on providing a high income.It does this by mainly investing in bonds, but also by investing a small amount in shares – usually those listed in the UK and Europe.
Within the bond universe, the focus on providing a high income means the managers tend to have a bias towards high yield bonds. These are higher risk than some other areas of the bond market as the companies that issue the bonds have a greater chance of not paying their debts. But in return investors receive a higher income to compensate them for the higher risk.
The fund takes charges from capital, which increases the income paid but reduces capital growth.
A sector-specific option – Worldwide Healthcare Trust Plc
Another way to think about satellites for an investment portfolio is to invest in a sector specific fund. These tend to invest in shares of companies focused on one area, which can make them more volatile than the wider stock market.
In recent years lots of investors have opted to add specifically to global technology funds to increase the amount they have in their portfolios.
However, technology tends to make up a large part of both US and global stock market indices (it was 26.63% of the MSCI AC World index at the end of July). So, using one of these as a satellite likely makes a portfolio even more concentrated in the technology sector.
Healthcare, on the other hand, is an area we think could offer diversification. It only made up 8.54% of the MSCI AC World index at the end of July.
It’s an area of the stock market that hasn’t performed well over the last couple of years, particularly in recent months.
The sector is struggling due to uncertainty around drug pricing policies in the US under the Trump administration. There’s a meaningful risk that the future earnings of many companies in the US could be substantially reduced.
But, for investors able to take a longer-term view, there’s clear potential for the sector to recover in the years to come, even if it continues to underperform over the short term.
Globally ageing populations and scientific advances in treatment are long-term tailwinds for healthcare companies which aren’t going to go away.
The Worldwide Healthcare Trust invests globally in healthcare companies and is managed by one of the most experienced teams in this area.
It was launched by OrbiMed, a healthcare investment company, in 1995 and was founded by Sven Borho who remains a managing partner of the firm, and one of the lead managers of this trust to this day.
At the time of writing the trust is trading on a discount to net asset value (NAV) of 6.61%.
We think the trust has a lot of appeal as a satellite investment to potentially provide some more volatile growth to a portfolio. But a sector-specific trust like this isn’t something we’d expect to make up a large part of an investment portfolio.
Investors should be aware that this investment trust can trade at a premium or discount to NAV and has the ability to use gearing (borrowing to invest). It can invest in derivatives, smaller companies, emerging markets and unquoted companies (those not listed on the stock market) – all of which increase risk.