Interactive Investor

Core and satellite funds for a £100K ISA portfolio

Sam Benstead gives 11 fund ideas for the two key parts of a balanced portfolio.

13th February 2024 09:34

Sam Benstead from interactive investor

A useful way of thinking about portfolio construction is to consider two different pots within a portfolio: core and satellite.  

The “core” portion should make up the bulk of a portfolio and include funds that can deliver steady growth in a range of market conditions. The funds should be well diversified to avoid difficult periods of underperformance and should not aim to shoot the lights out over shorter periods either. 

This doesn’t mean they will be sluggish performers, rather that they can be relied on over the long term for consistent gains and to give an investor access to key stock and bond markets. 

In contrast, satellite funds can add an adventurous element to a portfolio: a smaller allocation that could rise or fall more substantially, which gives access to more risky investment areas or themes.  

Dzmitry Lipski, head of funds research at interactive investor, says a typical investor with a long-time horizon to invest might allocate between 60% to 80% of a portfolio to core funds, with the rest in satellite positions.  

Investors nearing or in retirement should look to have lower-risk portfolios than those at the start of their investment journey and therefore a larger share in core funds, so long as attention is paid to stock and bond splits, according to Lipski.  

Taken from ii’s Super 60 list of recommended funds, here are some core and satellite fund ideas I have picked for a £100,000 portfolio. In a year’s time I will review the hypothetical portfolio to see how it fared in 2024.   

Core – 70% 

Global equity funds make ideal core strategies as they provide a one-stop shop for equity exposure. 

Vanguard LifeStrategy 100% Equity, a fund of funds portfolio made up of Vanguard’s own strategies, is an ideal portfolio building block. 

Costing 0.22% a year, it has about half in the US and about a quarter invested in the UK. It is overweight the UK (versus just 4% in the UK in the MSCI World index), which makes it a very balanced global equity option as it is not too concentrated in expensive US shares.  

I’ve given this fund a chunky 30% portfolio allocation as I view it as an excellent way of buying a diversified portfolio of shares, while paying attention to diversification and valuation.  

To add a higher-growth element to global equities, I’ve put 10% in Fundsmith Equity, which is about 70% in the US and counts tech stocks Microsoft and Meta Platforms among its top 10 holdings.  

The fund has performed very well, rising in bull markets but also not falling too much in bear markets. It has delivered around 15% a year since launch in 2010, but has failed to beat its benchmark, the MSCI World index, over the past three years. 

Fundsmith Equity owns about 30 quality-growth companies – those which famed investor Terry Smith reckons can keep growing their profits, have high profit margins, and operate in expanding industries.

Investors after more income from the core part of their portfolio could look at Artemis Income, which actively picks UK shares that have high dividend yields. The portfolio owns between 45 and 65 stocks that produce strong cash flows and return those profits to investors. The top positions are 3i Group, RELX and the London Stock Exchange Group

Jupiter Strategic Bond fits the bill for investors after a core bond fund. Manager Ariel Bezalel takes a “go-anywhere” approach to fixed income, allowing him to pick bonds from around the world to find the best income and capital growth opportunities. The portfolio owns more than 400 bonds and yields about 5%. 

Rounding off the “core” part of the portfolio, I’ve selected JPMorgan Emerging Markets , at a 10% allocation.  

It is on an attractive 10% discount to net asset value (NAV), and I like that is not too concentrated in China, which has proven itself one of the most volatile emerging markets. India is the largest country allocation, at 25% of the portfolio, but it also owns shares in Mexico, Brazil, South Africa and Taiwan, giving investors a good spread of emerging markets.  

Fund 

Allocation (%) 

Yield 

Fee 

1-yr return (%)

3-yr return (%)

5-yr return (%)

Vanguard LifeStrategy 100% Equity 

30 

1.53 

0.22 

22.6 

59.8 

Fundsmith Equity  

10 

1.31

0.94 

9.4 

20.1 

72.1 

Artemis Income 

10 

3.82 

0.8 

3.7 

24.1 

38.4 

Jupiter Strategic Bond 

10 

5.04 

0.73 

-7.5 

5.3 

JPM  Emerging Markets Trust 

10 

1.61 

0.87 

-11.8 

-24.7 

26.1 

Source: FE Analytics, 25 January 2024. Past performance is not a guide to future performance.

Satellite – 30% 

Satellite funds can tap into more adventurous parts of the investment world, providing more volatility but the potential for greater returns. Because of the extra risk, allocations should be smaller. I’ve gone with 5% for six funds.  

One such area is smaller companies, which tend to be more volatile than larger companies, but being less mature hold the potential for greater growth.  

Artemis US Smaller Companies buys smaller companies in the US, while the Henderson Smaller Companies investment trust does the same for the UK market.  

The Artemis US Smaller Companies fund is managed by Cormac Weldon and Olivia Micklem. The managers pick shares from a pool of more than 2,000 small and mid-sized US companies. America is home to a huge number of the world's most innovative, entrepreneurial and fastest-growing small companies – and its economy is booming, with GDP growth of 3.3% in the final quarter of 2023.  

America’s “smaller” companies are large by British standards, with around half the FTSE 100 index having a market cap of less than $10 billion. The portfolio holds between 50 and 70 shares whose stock market values are mostly below $10 billion (£7.9 billion). While the fund is focused on a relatively select list of companies, these are found across a breadth of sectors.  

Henderson Smaller Companies’ investment approach is focused on identifying quality-growth companies and holding them over the long term. It aims to hold around 100 companies, with housebuilder Bellway currently the largest position. Smaller UK companies are out of favour, which should appeal to bargain hunters. In fact, the FTSE 250 index has a price-to-earnings ratio (p/e) of just 12.5x, which is about half the ratio of the S&P 500 index of large US shares.  

I have also picked Scottish Mortgage, which is the flagship “growth” investment trust from Scottish fund group Baillie Gifford and makes an ideal satellite fund. Managers Tom Slater and Lawrence Burns invest in innovative public and private companies (currently around 30% of the portfolio). Standout stocks include early investments in Tesla, Amazon, Nvidia and ASML. Private companies it owns include payments processer Stripe and Elon Musk’s space group SpaceX.  

Owning such a volatile basket of shares means that drawdowns can be heavy, with the shares currently worth around half their late 2021 peak. Long term, the ii fund research team think the managers will deliver on their goal of finding innovation winners, but investors should be ready for a bumpy ride.  

China is another area that investors with a high appetite for risk could look at, with Fidelity China Special Situations trust an adventurous option in the space. China is out of favour, meaning that valuations are cheap in the world’s second-largest economy.  

The sharp decline in valuations means that, as of the end of 2023, the p/e ratio of the MSCI China index is just 11.7, which is lower than the 14.5 of the MSCI Emerging Markets index and the 19.8 of the MSCI All Country World. 

The MSCI World index, which does not include Chinese shares, is on a p/e of 20.7x, meaning that Chinese shares are at 56% discount to global shares. UBS puts this discount at one of its widest in nearly two decades, with the 2012-16 period also standing out. 

TR Property is also picked as a satellite holding. The investment trust invests in both listed and unlisted property assets, but has been out of favour due to the impact of rising interest rates on the property sector. The shares have fallen about 40% from their peak but have rallied strongly since November 2023, when central banks signalled that interest rates could fall in 2024.  

The trust owns more than 100 investments, meaning that it is well diversified, including by property sectors.  

Finally, I’ve selected WisdomTree Enhanced Commodities Ucits ETF as a hedge against another uptick in inflation. 

Commodities have been shown to be one of the best ways to protect against an inflationary spike, and this exchange-traded fund proved its worth in 2022 when stocks and bonds fell.  

Fund 

Allocation (%) 

Yield 

Fee 

1-yr return (%)

3-yr return (%)

5-yr return (%)

Henderson Smaller Companies 

3.3 

0.39 

-7 

-16 

11.4 

TR Property 

4.89 

0.84 

2.6 

-6 

-0.1 

Fidelity China Special Situations 

3.18 

1.18 

-31.5 

-52 

11.2 

Scottish Mortgage

0.53 

0.34 

2.6 

-38.2 

69.1 

WisdomTree Enhanced Commodities Ucits ETF 

0.35 

-10.7 

39.2 

41.3 

Artemis US Smaller Companies 

0.87 

7.9 

0.9 

58.3 

Source: FE Analytics, 25 January 2024. Past performance is not a guide to future performance.

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