Our in-house experts and professional investors suggest potential funds to orbit a core holding.
What constitutes a good ‘core’ investment for a beginner investor? Some people will say a low-cost passive fund, while others will champion the benefits of actively managed funds or investment trusts. Given this diversity of views on core holdings, you won’t be surprised to discover that opinions also vary on satellite investments.
An ideal ‘core’ investment is likely to be diversified, low-cost (although some investors may prefer to pay more for an active fund) and suitable to be held for the long term. In contrast, a satellite investment is often akin to adding a small dollop of ‘spice’ to your ‘portfolio’ (possibly a grand term for a beginner) through a higher-risk option that is more volatile in nature, but could deliver higher returns.
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A satellite might be your way of gaining exposure to a single theme or area the core part of your portfolio doesn’t cover. It may be more expensive than your core, but it can offer a route to superior returns without jeopardising your long-term goals.
Not everyone will adopt a core and satellite approach, as some beginners find that single core investment (such as a multi-asset fund) suits their aims. However, if you are contemplating adding some zest to your portfolio, here are some things to consider, and also some suggestions on potential satellites.
Six tips: what to look for in a satellite investment
1) Are there ‘gaps’ in your core investment?
For the sake of transparency, my core investment is Vanguard LifeStrategy 80% Equity, which is one of interactive investor’s multi-asset Quick-Start funds for beginners. This fund is diversified, but lacks exposure to smaller firms because it is tracking an array of global indices, such as the FTSE 100 and S&P 500, which are weighted heavily towards the largest firms.
One way for me to add spice is by investing in a smaller companies fund or investment trust as a satellite holding. Small firms are the agile minnows of business and can deliver strong performance over the very long term, but a downside is that such firms are high risk, and it’s likely to be a bumpy ride for investors.
The long-term outperformance of smaller companies over larger companies is a powerful investment trend. The numbers speak for themselves: research by the London Business School found that £1 invested in 1955 in UK smaller companies would have grown to £7,933 by the end of 2020. In contrast, £1 invested in UK large companies over that 65-year period would have grown to £1,054.
2) Consider how much risk you want to take
Can you stomach a Vindaloo? Everyone’s risk appetite is different and before you commit to a super-spicy satellite fund/trust or exchange-traded fund (ETF), consider the risks involved and ask yourself whether this investment is going to give you sleepless nights.
3) Think about your time horizon and your aims
If you are in your early 20s and at the start of your investing journey, you might feel able to take on more risk with a satellite holding because you have decades ahead of you to ride out stock market bumps, financial crises, future pandemics, etc. However, if you started investing later in life, say in your 50s, caution is the watchword, especially if any money you invest is going to help fund your retirement, for example.
4) Avoid duplication
Be sure to examine the underlying holdings of your core investment to avoid buying a satellite investment covering areas that you already have enough exposure to. Investors are often susceptible to something called ‘home bias’, where they are drawn to buying the UK market. Examine the fund’s factsheets – these are readily available on the asset manager’s websites – to look under the bonnet of your potential satellite.
5) Cost control
Actively managed funds (where you pay for the skill of an experienced stock picker, aka as a fund manager, in the hope that they will be able to outperform their benchmark), specialist funds, and thematic ETFs generally have higher ongoing charges figures (OCF) than a conventional passive fund (for examples those that track the FTSE 100 or S&P 500). Higher charges will impact on your returns if its performance disappoints.
6) How much of your portfolio do you want to dedicate to a satellite?
If your portfolio contains one core holding, what weighting do you want to give to a satellite? You could opt for a 70:30 percentage split between core and satellite, but it depends on your risk tolerance, and you also have to take into account asset allocation; your core holding may already have a lot of exposure to equities, for example.
Traditionally, portfolio construction has been a 60:40 split between equities and bonds. But, dear reader, you won’t be surprised to learn that people disagree on this ratio, too.
Satellite investments for beginners
Dzmitry Lipski, head of funds research at interactive investor, suggests two funds from ii’s ACE 40 rated list of ethical investments that could work as satellite holdings in a well-diversified portfolio.
For the ethically minded, who are keen to do good while also generating returns, Montanaro Better World fund might suit them. It invests in global small and mid-cap companies, making it a good fit as a satellite holding.
Lipski says: “It invests in ‘quality growth’ companies that make a positive impact on the world. The fund is overseen by highly regarded managers Mark Rogers and Charles Montanaro, and the portfolio is comprised of global small and mid-cap companies, split into six impact themes: environmental protection; the green economy; healthcare; innovative technology; nutrition and well-being.”
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The fund was launched in 2018 and according to the latest data available (30 November), it’s top holdings include laboratory instrument manufacturer Sartorius Stedim Biotech (EURONEXT:DIM), manufacturer of wood-alternative-decking products Trex (NYSE:TREX), and US cloud security platform Zscaler (NASDAQ:ZS). Its largest geographical exposure is to the US (50%) followed by Sweden (8%), and Switzerland (7%).
Lipski also likes Threadneedle UK Social Bond fund, another ACE 40 investment. He says, “the fund is managed by highly regarded investor Simon Bond, and aims to provide income and capital growth over the long term by investing in a diversified portfolio of bonds across eight thematic impact areas, including affordable housing, education, financial inclusion, and infrastructure. A percentage of the fund’s earnings goes towards supporting Big Issue Invest in its work financing social enterprises.”
This fund offers some diversification if beginner investors have chosen a core investment that has a high weighting to equities, but it is important to stress that this bond fund has a niche remit, so it is higher risk than a typical bond fund. So, this satellite option would very much be adding ‘spice’ to your portfolio, and could complement a core holding comprised of developed market bonds.
Threadneedle UK Social Bond Fund’s top holdings as of 30 November 2021 include Nationwide Building Society (LSE:NBS), The Wellcome Trust, and NatWest (LSE:NWG). Its largest sector exposures are to utilities and the environment (24.3%), housing and property (15.8%), and transport and communications infrastructure (15.6%).
Kelly Prior, investment manager in the multi-manager team at BMO Global Asset Management, has two different suggestions for beginner investors to mull over, including one that could offer a steady inflation-beating return at a time when inflation is rising.
First, the FTF ClearBridge Global Infrastructure fund, which appears on interactive investor’s Super 60 rated list of investments. The fund is run by Nick Langley, Shane Hurst, Charles Hamieh and Daniel Chu.
Prior says: “The Franklin Clearbridge Infrastructure fund aims to give a steady inflation-beating real return. The team are (in their words) infrastructure specialists managing investments, not investment managers managing infrastructure. This, they claim, gives them an edge in understanding the long-term cash flow basis for core infrastructure and how this should be valued.
“Focusing on business’ governed by strict regulations, they have a certainly of outcome with such assets, the thing that varies is the price that you pay. These are assets that are long duration in nature, but do offer a healthy income that should have scope to move with inflation given the regulated nature of the underlying assets. In a world where there is such a focus on styles of investing, this area could actually be pretty interesting as a complement to more core offerings.”
The fund’s top holdings as of 30 November 2021 include National Grid (LSE:NG.), energy firm SSE (LSE:SSE), and US utility firm Clearway Energy (NYSE:CWEN.A). The fund, which was launched in 2016, has a concentrated portfolio of 36 holdings. Its biggest exposure is to the US (29.8%), Canada (14%) followed by Spain (12.8%).
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Prior’s other suggestion is the Liontrust Global Dividend fund. Given the core of the portfolio is likely to have a significant amount of global equity exposure, it is important that a global fund for the satellite segment is offering something different. In the case of Liontrust Global Divided, Prior points out that its fund managers, Storm Uru and James Dowey, use innovation as a focus when sourcing ideas for the fund.
She says: “What is interesting about this mandate as a global offering is its balanced aim of looking for companies that are able to grow their capital, but that are mature enough to be paying back some of the income they have harvested by being innovative thinkers and leaders in their peer groups.
“Looking through the portfolio reveals a very different take on global investing as a result of this, meaning the fund is a great complement to the more traditional offerings in this space.”
This fund was launched in 2012, and as of November 2021 it had 41 holdings in the portfolio. Top 10 holdings include Chinese internet giant Tencent (SEHK:700), and financials Visa (NYSE:V) and JPMorgan Chase & Co (NYSE:JPM). Its largest geographic exposure is to the US (54.7%), followed by China (10.6%), and Canada (7.1%). In terms of sectors, its largest weightings are to information technology (24.2%), financials (14.6%), and communication services (10.6%).
In terms of ETFs, investors may consider a thematic approach. There are numerous themes, including cloud computing, robotics and automation, the adoption of electric cars, and clean energy.
Examples to play the above themes (there are other options) include WisdomTree Cloud Computing ETF (LSE:WCLD), L&G Artificial Intelligence ETF (LSE:AIAI), iShares Electric Vehicle & Driving Tech ETF (LSE:ECAR) and iShares Global Clean Energy ETF (LSE:INRG).
Because of their narrow focus, thematic ETFs are risky, but as part of a diversified portfolio, one could make sense as a satellite for a beginner.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.