Core-Satellite Portfolio

bcfclee27

Is there anything wrong with me going for a core-satellite approach for my portfolio.

My intention is to have a core of 80% of my portfolio with Vanguard Life Strategy & HSBC Global Strategy.

My thinking here is these products are ready made off the shelf solid investments for inexperienced investors of which I am.

The 20% would be made up of riskier Investment Trusts.
I want the added risk here for better long term returns.

My portfolio so far is....

ISA - 40k VLS (20k VLS 60 - 20k VLS 80)
LISA - 10k Lindsell Train Global Equity Fund


The ITs I would look to hold would be....
- Monks Investment Trust
- Bankers Investment Trust

I would look to use my remaining ISA allowance this year by investing in HSBC Global Strategy (core) & Monks/Bankers (satellite).

Now I know I will probably get a lot of flack for this as I have previously changed my mind several times on my strategy however is there anything wrong with what I am proposing above.

Like I said the intention is to have a solid base with VLS/HSBC and the 20% to have a bit of a punt with Investment Trusts for better returns.

For info the amount I have available to invest is about 125k in total.

If people suggest that I just throw it all into my core and VLS/HSBC then fair enough.


Thanks for your help / input.

bowlhead99

bcfclee27 wrote: »

Is there anything wrong with me going for a core-satellite approach for my portfolio.

Not if you know what you are doing ; though you did say you are not an experienced investor.

My intention is to have a core of 80% of my portfolio with Vanguard Life Strategy & HSBC Global Strategy.

My thinking here is these products are ready made off the shelf solid investments for inexperienced investors of which I am.

the intention is to have a solid base with VLS/HSBC and the 20% to have a bit of a punt with Investment Trusts for better returns.

Lots of people with 6-figure portfolios will use a core/ satellite approach. Rather than having say 10-15 active funds in the different specialist areas, it's possible to lower the overall cost of the portfolio by having index funds in the middle doing the 'heavy lifting' towards your overall objectives, and active elements around the side attempting to give you an above-benchmark return.

However, your idea seems to be to have a 'proper portfolio' with one hand and 'a bit of a punt' with the other. That could be a 50/50 split or an 80/20 split or a 95/5 split. As a self-confessed inexperienced investor it is probably best to have the 'punt' element be quite small.

If you don't take care with what you are punting around the edges you will change the shape of the overall portfolio (e.g. current ISA core is multi asset 70% equity but your satellites are 100% equity and may have a larger alllocation to particular regions). Such as, about a fifth of Monks is emerging markets, while Bankers only has a very small (<3%) emerging allocation but around 28% developed Japan/Pacific.

While Bankers and Monks (and Lindsell Train) have done well in the good times they are at the end of the day just global equities growth funds. I tend to think of visualising a core/satellite or hub/spoke portfolio as having something big and mixed and generalist in the middle and then a bunch of more specialist elements around the outside, you could sketch it out on a bit of paper like that. Whereas if the specialist elements are just 'global growth' and you're not looking at other elements like global equity income, bonds, property, private equity, infrastructure etc etc, then perhaps what you really end up with is not so much 'core and satellite' but 'balanced portfolio and punt portfolio'.

Now I know I will probably get a lot of flack for this as I have previously changed my mind several times on my strategy however is there anything wrong with what I am proposing above.

Investing is all about opinion and it's difficult to say that any particular approach will 'fail' as it very much depends on what objectives you have. If your objectives are vague, such as just making 'long term returns', you can probably achieve that objective by simply buying equity-focussed funds that have exposure to most regions of the world and holding them for the long term.

If you build a core to your portfolio that doesn't have enough equities in it for your taste, then yes you should probably add some extra equities fund(s) to it. But quite what those funds should be, is subjective. If you are new to investing, it may be a bit of a punt, in which case you have to question whether it wouldn't just be better to get a core of investments professionally allocated and not try to mess with it by bringing in other people's different professional allocations in proportions you made up yourself. Are you just doing that because the index funds are a bit 'boring' and you want to sex it up a bit by taking a punt on people that hope to beat them?

It's worth considering how much outperformance you can realistically achieve without taking undue risks and whether you should have just gone for a higher risk core fund in the first place.

Certainly if you look at it from the other end: if you had first just bought a few global growth equities funds, you'd probably be well advised to put more money into something balanced with mixed asset classes if your overall intention is not just to be fully in equities. But that doesn't mean if you already have something balanced with mixed asset classes, you should go out and buy some more active equities funds.

For me, if I was investing £150k I wouldn't stick it all in one big index-based mixed asset fund because I haven't found one that covers everything I want. I'd rather build something myself and £150k is enough to not have problems with minimal balances in some areas - and I don't mind the research and time taken to deal with admin and rebalancing. But I have some experience with investments. If I didn't have that, I would be more tempted by buying something off the shelf (rather than building something properly bespoke or buying something off the shelf and trying to customise it).

As you mention, you've changed your mind several times already. Lots of strategies can work and each have their fans and detractors. Before you go ahead, make sure it's really what you want, because the point of having a strategy is it sets out your approach and guides your ongoing behaviour, and if you are going to change your mind yet again several months down the line without having had a chance to properly evaluate its performance over a long period it is going to be difficult to get used to the psychology of just leaving the portfolio alone to do its job.

TheTracker

I am not a fan of the core-satellite analogy. It can lead newer investors into a situation where satellites are interpreted as deserved speculative extravagances for being sensible with the remaining bulk of investment. If you are inexperienced, and you have determined a multi asset fund (like VLS) is suitable for you now, then the appropriate way to add risk for potentially higher long term returns is to dial yourself up a notch on the multi-asset product offering. eg from the VLS 70 you have made to the VLS80 without the ITs. Betting a double digit portion of your portfolio on punts is naive.

firestone

Your 2 IT's are solid choices (hopefully as i am in one of them) but i am not sure they really give you a satellite investment.Leaving to one side your non equity on the multi asset portion you would seem to end up with more of a passive/active global investment which could still be a good thing and many take that approach.
But to really have a satellite i feel you would need to look at things like Tech,Property,Bio Tech,Environmental or a really defined field such as Water/Timber or Robotics etc or by region i.e Japan or EM.If doing a IT with risk involved but remembering the rule about past performance then something like Scottish Mortgage might appeal.

ewaste

I would agree that £125k is enough to spend the time to construct a portfolio as I personally don't have complete faith in putting it 100% of that into Multi-Asset funds. However using Global Equity funds as satellites seems a bit peculiar as it's in some sense replicating the core Multi-Asset fund albeit with humans rather than indexes in control.

If I were taking this approach, which I actually more or less do, I would be looking for something that the Multi-Asset fund didn't cover at all e.g. Property or Special Situation funds. I personally have active small-cap funds, both developed and emerging, as my satellites because my opinion is that they will outperform an index of such companies. In my opinion they also pull things away from 90% of the money being in 10% of the companies due to cap weighted index funds.

I will also put my hands up to the fact that I buy and sell stocks, which are really punts albeit ones that I have not lost money on although I don't always get it right. I think I probably do this so I don't !!!!!! around too much with the main chunk over the long term it needs to work.


So eh... basically along the lines of what Bowlhead etc already said

A_T

I don't there's anything fundamentally wrong with what you're doing but I suspect the portfolio won't perform much differently to a global index tracker with appropriate bond fund allocation.

ColdIron

I'm not convinced that adding more of the stuff that you already have in your core counts as satellite. Ignoring the HSBC funds, you have obviously looked at the VLS 80 and 60 and concluded that one has too much equity and the other not enough, so you have constructed a blend of the two with 70% equities and 30% bonds. By adding a 100% active equity IT you have ended up with 76/24 equity/bond mix or almost a VLS 80, which you earlier rejected, that is overweight a couple of hundred companies in comparison to your starting point. Was this the plan all along or just where we are when the music stopped (for now)?

Just as a discussion point, rather than messing with the allocation or adding several single sector funds (as opposed to a global one) how about keeping things simple with a global small cap tracker? If you maintained an 80/20 split with the VLS60 you would have 32% bonds which is close to what you originally wanted and also have over 4,000 additional companies with no overlap. You could easily extend this to add other asset classes for more diversity. Not so much core and satellite (which is only one of several strategies) as layered, like building a road

I'm not suggesting that you do this, I'm just illustrating a strategy with a clear rationale that I could defend and have belief in 5 years down the road. The one you propose has no clear objective (to me at least) and is likely to be subject to endless tinkering

Prism

Your core here is the global economy. VLS, HSBC GS and Lindsell Train Global are all heavily weighted to global large companies. They have some regional differences but in the scale of things this doesn't matter too much. For example, it doesn't really matter than Amazon is listed as a US company. It doesn't matter if Unilever is a UK or Dutch company as it makes most of its money from emerging markets. The performance of all of them will move with the world economy. The same could be said of most global funds.

Where all of them are under exposed is in smaller companies. This is where region becomes more important as those companies tend to be more exposed to their own country. So satellite funds tend to focus on smaller regional funds. There is reasonable evidence that over the long term smaller company funds tend to perform better, but not in the short term during recessions.

Another option is to focus on sectors or concepts that are under weighted in the global funds, like house builders, automation or biotech. These however are often also invested in smaller companies so you tend to double up in some companies if you try and do this and go regional.

bcfclee27

bowlhead99 wrote: »

Not if you know what you are doing ; though you did say you are not an experienced investor.

Lots of people with 6-figure portfolios will use a core/ satellite approach. Rather than having say 10-15 active funds in the different specialist areas, it's possible to lower the overall cost of the portfolio by having index funds in the middle doing the 'heavy lifting' towards your overall objectives, and active elements around the side attempting to give you an above-benchmark return.

However, your idea seems to be to have a 'proper portfolio' with one hand and 'a bit of a punt' with the other. That could be a 50/50 split or an 80/20 split or a 95/5 split. As a self-confessed inexperienced investor it is probably best to have the 'punt' element be quite small.

If you don't take care with what you are punting around the edges you will change the shape of the overall portfolio (e.g. current ISA core is multi asset 70% equity but your satellites are 100% equity and may have a larger alllocation to particular regions). Such as, about a fifth of Monks is emerging markets, while Bankers only has a very small (<3%) emerging allocation but around 28% developed Japan/Pacific.

While Bankers and Monks (and Lindsell Train) have done well in the good times they are at the end of the day just global equities growth funds. I tend to think of visualising a core/satellite or hub/spoke portfolio as having something big and mixed and generalist in the middle and then a bunch of more specialist elements around the outside, you could sketch it out on a bit of paper like that. Whereas if the specialist elements are just 'global growth' and you're not looking at other elements like global equity income, bonds, property, private equity, infrastructure etc etc, then perhaps what you really end up with is not so much 'core and satellite' but 'balanced portfolio and punt portfolio'.
Investing is all about opinion and it's difficult to say that any particular approach will 'fail' as it very much depends on what objectives you have. If your objectives are vague, such as just making 'long term returns', you can probably achieve that objective by simply buying equity-focussed funds that have exposure to most regions of the world and holding them for the long term.

If you build a core to your portfolio that doesn't have enough equities in it for your taste, then yes you should probably add some extra equities fund(s) to it. But quite what those funds should be, is subjective. If you are new to investing, it may be a bit of a punt, in which case you have to question whether it wouldn't just be better to get a core of investments professionally allocated and not try to mess with it by bringing in other people's different professional allocations in proportions you made up yourself. Are you just doing that because the index funds are a bit 'boring' and you want to sex it up a bit by taking a punt on people that hope to beat them?

It's worth considering how much outperformance you can realistically achieve without taking undue risks and whether you should have just gone for a higher risk core fund in the first place.

Certainly if you look at it from the other end: if you had first just bought a few global growth equities funds, you'd probably be well advised to put more money into something balanced with mixed asset classes if your overall intention is not just to be fully in equities. But that doesn't mean if you already have something balanced with mixed asset classes, you should go out and buy some more active equities funds.

For me, if I was investing £150k I wouldn't stick it all in one big index-based mixed asset fund because I haven't found one that covers everything I want. I'd rather build something myself and £150k is enough to not have problems with minimal balances in some areas - and I don't mind the research and time taken to deal with admin and rebalancing. But I have some experience with investments. If I didn't have that, I would be more tempted by buying something off the shelf (rather than building something properly bespoke or buying something off the shelf and trying to customise it).

As you mention, you've changed your mind several times already. Lots of strategies can work and each have their fans and detractors. Before you go ahead, make sure it's really what you want, because the point of having a strategy is it sets out your approach and guides your ongoing behaviour, and if you are going to change your mind yet again several months down the line without having had a chance to properly evaluate its performance over a long period it is going to be difficult to get used to the psychology of just leaving the portfolio alone to do its job.

Thank you Bowlhead a very detailed response I appreciate it.

bcfclee27

ColdIron wrote: »

I'm not convinced that adding more of the stuff that you already have in your core counts as satellite. Ignoring the HSBC funds, you have obviously looked at the VLS 80 and 60 and concluded that one has too much equity and the other not enough, so you have constructed a blend of the two with 70% equities and 30% bonds. By adding a 100% active equity IT you have ended up with 76/24 equity/bond mix or almost a VLS 80, which you earlier rejected, that is overweight a couple of hundred companies in comparison to your starting point. Was this the plan all along or just where we are when the music stopped (for now)?

Just as a discussion point, rather than messing with the allocation or adding several single sector funds (as opposed to a global one) how about keeping things simple with a global small cap tracker? If you maintained an 80/20 split with the VLS60 you would have 32% bonds which is close to what you originally wanted and also have over 4,000 additional companies with no overlap. You could easily extend this to add other asset classes for more diversity. Not so much core and satellite (which is only one of several strategies) as layered, like building a road

I'm not suggesting that you do this, I'm just illustrating a strategy with a clear rationale that I could defend and have belief in 5 years down the road. The one you propose has no clear objective (to me at least) and is likely to be subject to endless tinkering

Thanks everyone for your replies and help.

To be honest my risk was around 70% however the more I have researched into investing and looked at my circumstances the more I feel I now sit somewhere around 80% equity, maybe even higher than that.

The reason I have gone for VLS 60 & 80 in an equal mix is because I have it in my head that 60 & 80 are invested in different areas especially with bonds.....
Is this correct ? Not sure where I'm getting this from.
If not and the difference is just that they are just riskier because of the more equities then I would probably move all the 60 into the 80.

It's the same with splitting some into HSBC global strategy.
The reason I have done this is because some seem to not like the uk bias - however others like the home bias so maybe I'm better off sticking all in VLS.

As you can see as much as i spend a lot of time researching this forum and others, it has become a hobby, however the more I learn the more I get confused and struggle to grasp how it all works.

I'm pretty happy however that I understand VLS to a degree.
I'm also aware VLS as you say is light to non existent on global small caps and I think others have said it's also light on emerging markets ?

Would I therefore be better off investing in as you say a global small cap tracker and maybe an emerging markets tracker both on the VLS platform ?

Thanks again for all your help.

A_T

bcfclee27 wrote: »

Thanks everyone for your replies and help.

To be honest my risk was around 70% however the more I have researched into investing and looked at my circumstances the more I feel I now sit somewhere around 80% equity, maybe even higher than that.

The reason I have gone for VLS 60 & 80 in an equal mix is because I have it in my head that 60 & 80 are invested in different areas especially with bonds.....
Is this correct ? Not sure where I'm getting this from.
If not and the difference is just that they are just riskier because of the more equities then I would probably move all the 60 into the 80.

60 and 80 invest in the same things except 60 has 60% equities.

I'm pretty happy however that I understand VLS to a degree.
I'm also aware VLS as you say is light to non existent on global small caps and I think others have said it's also light on emerging markets ?

Would I therefore be better off investing in as you say a global small cap tracker and maybe an emerging markets tracker both on the VLS platform ?

Thanks again for all your help.

You could go 70% Vanguard FTSE Global All Cap Index fund then you'd have small cap as well. 30% could go in Vanguard Global Bond Index fund. This would be the simplest way to get to what you seem to be trying to achieve.