Core + satellites – what do/would you choose?

aroominyork

I like a core + satellite approach to funds and on a long drive today thought about what I would choose if I could hold not more than four satellites. It showed me I could easily lose a few of my satellite funds since three seems enough for me. So, for anyone who wants to play, what would be your choice if you could have one core and a maximum of four satellites?

I would hold:

50% in Fidelity Index World (developed markets only)

20% in Fundsmith (or in my case Fundsmith Sustainable to avoid Philip Morris)

20% in Stewart Investors Asia Pacific Sustainability (the mid-cap companies have made it historically outperform its sister ‘Leaders’ fund)

10% in Liontrust UK Smaller Companies

This makes me happily overweight emerging markets and small/mid caps, though 47% in the US is still a bit more than I would want. It is tilted to growth, though not too radically, but I accept there is a bit of risk there.

dunstonh

I like a core + satellite approach to funds 

me too.

Although I do it a different way to you.  I have an index tracker covering UK, Europe and US as the core and the satellites are managed funds in each of those areas., typically more small/mid-cap focus.   I don't do that with Asia, Japan and EM though due to smaller allocations to each of those.

aroominyork

And that's exactly why I should never have started this thread, because now I am back to thinking about the (previously put to bed) issue of US small caps and T Rowe Price which is not excessively growth-focused (from this) and has low risk with above average/high return (from this). Although I guess I put it back to bed by saying it would only further increase my US exposure.

maxsteam

My favourite satellite is Echo 1. It was basically a giant balloon but it was the first communication satellite.

I've no idea how an investment fund can be a satellite. I'm still trying to work out the mass and velocity of an equity as, without these numbers, there surely cannot be any momentum investing.

darkidoe

I started this year with newish allocation.
80% Core - (70% in an Index World Tracker; 10% in a Global Growth Fund)
20% Satellite - 5% each in Europe, UK, US, Japan - Smaller Companies
I was into 'Value' fund for a few years to begin with but I having experienced the underperformance and understanding a bit more about my investment time horizon, I have decided to go for growth.
Total of 6 Funds, slightly more for my liking and probably overlap between the index and growth funds, but I was interested to see how this approach will do. 

JohnWinder

dunstonh said:

I like a core + satellite approach to funds 

me too.......I have an index tracker covering UK, Europe and US as the core and the satellites are managed funds in each of those areas., typically more small/mid-cap focus. 

We need to be just a bit careful of that actively managed funds' space. 10% of those UK funds in the mid-cap space didn't survive ten years, well within the investing horizon of most equity investors; and 74% of UK/EU active funds investing in US small cap under-performed an equivalent index fund after 10 years. Identifying the funds that will out-perform the core, ahead of time, is the challenge. How to do it?

https://www.evidenceinvestor.com/europes-active-managers-failed-in-2020/

aroominyork

dunstonh said:

I like a core + satellite approach to funds 

me too.

Although I do it a different way to you.  I have an index tracker covering UK, Europe and US as the core and the satellites are managed funds in each of those areas., typically more small/mid-cap focus.   I don't do that with Asia, Japan and EM though due to smaller allocations to each of those.

Is this for your personal investments or your clients? It would be interesting to know how they differ; for example, I imagine that if you wanted to overweight EMs or not overweight the UK, you might not do that for your clients.

darkidoe said:

I started this year with newish allocation.
80% Core - (70% in an Index World Tracker; 10% in a Global Growth Fund)
20% Satellite - 5% each in Europe, UK, US, Japan - Smaller Companies
I was into 'Value' fund for a few years to begin with but I having experienced the underperformance and understanding a bit more about my investment time horizon, I have decided to go for growth.
Total of 6 Funds, slightly more for my liking and probably overlap between the index and growth funds, but I was interested to see how this approach will do. 

80/20... interesting - I am trying to see if there is a Pareto principle here, eg does 80% of outperformance come from the smallest 20% of companies. (That's probably messy thinking.)

JohnWinder said:

dunstonh said:

I like a core + satellite approach to funds 

me too.......I have an index tracker covering UK, Europe and US as the core and the satellites are managed funds in each of those areas., typically more small/mid-cap focus. 

We need to be just a bit careful of that actively managed funds' space. 10% of those UK funds in the mid-cap space didn't survive ten years, well within the investing horizon of most equity investors; and 74% of UK/EU active funds investing in US small cap under-performed an equivalent index fund after 10 years. Identifying the funds that will out-perform the core, ahead of time, is the challenge. How to do it?

https://www.evidenceinvestor.com/europes-active-managers-failed-in-2020/

Interesting table in the link, but re 10% of funds not surviving ten years that does not mean 10% of money is in funds which did not survive ten years. There are lots of funds with £10m - £20m AUM and which most informed people would steer well clear of.

dunstonh

Is this for your personal investments or your clients? It would be interesting to know how they differ; for example, I imagine that if you wanted to overweight EMs or not overweight the UK, you might not do that for your clients.

I use the same portfolio set to my risk profile and timescale (we use timescale on the weightings).      The data and research paid for has shown to be consistent and reliable.  I am not going to overrule it as that would be breaking the structure and process that has been created by people that know more than I do and have access to more direct data than I do.   

I will listen to what people want and if they want a variance I will consider the validity of it.  If I disagree I will say why.       I am not asked often but the few that do tend to be caught with fashion investing and I inevitably put them off.  Or they are behind the times and the portfolio has already done what they want (often years earlier).  A couple of them I told to open their own investment for things they want to do themselves.  One still does and I know she fashion invests.  The other gave up as they got bored and couldnt be bothered any more.     Investing is not fun but often some DIY investors start out thinking it is.  Investing is an administration task. Nothing more.

Albermarle

What about using satellites for diversification . Infrastructure or private equity for example ? Or is that classed as fashion investing ?

aroominyork

dunstonh said:

Is this for your personal investments or your clients? It would be interesting to know how they differ; for example, I imagine that if you wanted to overweight EMs or not overweight the UK, you might not do that for your clients.

I use the same portfolio set to my risk profile and timescale (we use timescale on the weightings).      The data and research paid for has shown to be consistent and reliable.  I am not going to overrule it as that would be breaking the structure and process that has been created by people that know more than I do and have access to more direct data than I do.   

I will listen to what people want and if they want a variance I will consider the validity of it.  If I disagree I will say why.       I am not asked often but the few that do tend to be caught with fashion investing and I inevitably put them off.  Or they are behind the times and the portfolio has already done what they want (often years earlier).  A couple of them I told to open their own investment for things they want to do themselves.  One still does and I know she fashion invests.  The other gave up as they got bored and couldnt be bothered any more.     Investing is not fun but often some DIY investors start out thinking it is.  Investing is an administration task. Nothing more.

Is your firm in a small minority that uses a core + satellite approach? My hunch is that most IFAs put together 100% active portfolios to justify their management fees; clients would balk at paying 1% to invest 70% in index funds, but swallow the fee if they accept that research is needed for every Pound they invest.

dunstonh

Albermarle said:

What about using satellites for diversification . Infrastructure or private equity for example ? Or is that classed as fashion investing ?

Fashion investing is where investors buy what they read in the press or being pushed by third parties  i.e. they build their portfolio purely on what is fashionable.

There are multiple ways to build a portfolio.  No one way is best.   If your portfolio structure is to allocate an amount to a certain area, then that is a choice you can make.       If it fits a structure and process then great.  If you are just allocating random numbers do it and there is a lack of process and structure then not so great.