How the experts are building ‘satellite’ portfolios right now

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A well-built core portfolio can provide broad exposure to markets, but what happens around the edges can be just as important.  

For fund selectors and asset allocators, satellite holdings offer a way to introduce more targeted exposures, diversify away from crowded areas of the market and express higher-conviction views. 

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But with abundant choice, deciding what belongs in the satellite portion of a portfolio is not straightforward. 

How much should a balanced investor allocate, which gaps should these holdings fill and where are selectors finding opportunities today? 

Following on from our feature on how core portfolios are being built right now, we asked fund selectors and asset allocators how they are constructing the satellite around their core portfolios. 

How much satellite exposure is enough? 

For Mattioli Woods, satellite holdings tend to be modest, typically 10 to 20% of an equity portfolio for a “balanced” client. 

“Their role is not to chase the latest market fashion, but to provide access to areas where we believe the opportunity set is underappreciated or where active management can genuinely add value,” says investment manager Lauren Hyslop. 

Dzmitry Lipski, head of funds research at interactive investor, suggests a slightly higher allocation, at 20 to 30%. 

“The focus today is less about finding the next best idea but more about addressing weaknesses in traditional portfolios,” he says. 

At Matthew Douglas, meanwhile, core and satellite are not defined by a fixed allocation. The firm holds a core collection of global funds accounting for around 40% of its equity allocation, with regional and specialist funds surrounding these holdings. 

“We have a slightly alternative approach to satellite positions within our portfolios,” says Thomas Pescott Frost, financial adviser and portfolio manager at Matthew Douglas.  

“We don’t tend to think of satellite positions in a purely a thematic sense. Internally, we would consider our active region-specific funds to be satellite positions that surround the core global funds.” 

What should satellites add? 

For many of our experts, the satellite allocation is less about chasing additional performance and more about making sure a portfolio is not simply doubling down on its core exposures. 

“The key is that satellites must complement the core funds, not replicate them,” says FundCalibre managing director Darius McDermott.  

“The core does the heavy lifting, providing diversified, dependable exposure, while the satellites give us the flexibility to target areas that a mainstream portfolio may not capture.” 

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Concentration risk is a key concern that satellite positions can help address. 

“We are concerned about the concentration risk in many indices – Asia, emerging markets, the US and UK are all very heavily weighted to the top names,” says Pescott Frost. 

The funds research team at ii sees satellites as a way to complement global index exposure with value, income and non-US assets. 

“The overall objective is to make the satellite allocation genuinely different from the core, rather than adding more of the same US mega-cap exposure already dominant in most global funds,” says Lipski. 

He highlights the Fidelity Global Dividend W Acc (B7GJPN7) fund, while Matthew Douglas has high conviction in Artemis Global Income I Inc (B5N9956). 

Are themes still the answer? 

Satellite investing has traditionally been associated with taking targeted positions in themes expected to benefit from long-term structural change.  

But as concentration in broad market indices has grown, some selectors are reassessing whether dedicated thematic funds are still the best way to differentiate a portfolio. 

“One area where our thinking has evolved is thematic investing,” says Hyslop. “While themes such as artificial intelligence (AI) have captured investors’ imagination, we generally avoid dedicated thematic funds.

“They are often expensive, concentrated and can result in investors paying a premium for exposures they may already own elsewhere.” 

Technology is a case in point, with many technology funds being heavily exposed to the same mega-cap companies that dominate broad US equity indices. 

Mattioli Woods prefers to express conviction instead through regional allocations and specialist areas where active managers have greater scope to outperform. 

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While Matthew Douglas doesn’t have a “huge variety of thematic satellite positions”, Pescott Frost says that the funds the firm uses tend to lean into particular investment styles and themes – quality growth stocks offering exposure to AI infrastructure or value stocks that play to themes such as rising defence spending and the recovery in financials, for example. 

“We have a good understanding of the themes within each of the funds in our portfolios,” he says. 

FundCalibre does view satellite exposure through a thematic lens, as a means to target areas of long-term structural growth. 

“We build our satellite portfolio exposure around long-term thematic trends because we believe good strategic asset allocation can be a driver of outperformance,” says McDermott. 

Technology and water and waste are two themes it targets, through allocations including the Polar Capital Technology Ord (LSE:PCT) trust and the Regnan Sustainable Water and Waste IGBP (BMYXD32) fund. 

While most of its satellite positions account for 2% to 3.75% of portfolios, Polar Capital Technology has become a larger position in its aggressive portfolio “as the underlying themes become integrated into the overall economy”. 

One of Matthew Douglas’ few thematic satellite positions is the Liontrust Global Technology C GBP Acc (BYXZ5N7) fund, at 1% of balanced portfolios. 

Where else can satellites orbit? 

Geographic allocations are one way that selectors are using satellite positions to move beyond areas already well represented in core portfolios. India and Japan are two markets attracting particular conviction. 

“India has some of the most compelling growth fundamentals in the world, underpinned by favourable demographics, rising domestic middle-class consumption and continued investment in infrastructure, but it remains underrepresented in many global portfolios,” says McDermott. 

To access the opportunity, he uses the Chikara Indian Subcontinent S (GBP UnH) (BL0BMT2) fund, with its “ability to go deeper into the mid and small-cap markets”. 

Matthew Douglas sees Japan as “exciting for several reasons” and has an overweight position, with JK Japan GBP Acc (BJBY7B3) its highest-conviction position. 

It also holds Comgest Gr Japan GBP U Acc (BYYLQ19), which has holdings that play to themes including an ageing population, the AI supply chain and growing domestic confidence. 

Smaller companies offer another route away from the mega-cap stocks that dominate many broad market indices. 

Mattioli Woods has a long-term satellite allocation to the Lazard Baylight US Sm Cap Eq EA Acc GBP (BRPT4C0) fund. 

“This is a deliberate, additional tilt rather than a core building block, reflecting a specific view on an area of the market we believe is overlooked,” says Hyslop. 

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The fund uses an AI-enhanced quantitative process to analyse thousands of companies, with Hyslop highlighting the broader range of businesses represented in the Russell 2000 and the potential for AI-related investment to benefit companies further down the supply chain, rather than just the largest technology names. 

Matthew Douglas also has an overweight exposure to small and mid-caps, primarily in the UK, Europe and the US. 

How far can satellites reach? 

Satellites do not have to be confined to equity markets. For some allocators, they also provide a way to derive different sources of income, diversification or defensive characteristics from other asset classes. 

Pescott Frost balances its equity exposure mostly with global corporate bonds over sovereign bonds, alongside a small allocation to gold.  

Within the bond allocation, it uses active strategies with a bias towards investment grade as a core source of income, to which it adds positions in areas such as high-yield bonds and emerging market debt. 

Lipski also sees scope for satellite portfolios to allocate to active bond funds, giving the example of Jupiter Strategic Bond I Acc (B4T6SD5), as well as to “add real diversification” through infrastructure, gold, commodities and other real assets. 

He highlights the WisdomTree Enhanced Commodity Carry GBP (LSE:WCRV) and FTF ClearBridge Global Infras IncSIncGBP (BMF4TM5) fund. 

“Passive funds work well for broad thematic and real asset exposure, while active managers can add value in fixed income, emerging markets and specialist equity strategies,” adds Lipski. 

Infrastructure is another satellite exposure for Matthew Douglas, with the WS Nomura Glbl Infras Secs B Acc (B1W2BX0)fund accounting for around 4.5% of a balanced portfolio. 

Elsewhere, satellites used by FundCalibre to access more specialist areas of the market include Polar Capital Biotech I Inc GBP (B42P0H7) and Polar Capital Global Ins F Acc (B61MW55).