Core-Satellite Investing
Core-satellite investing refers to a portfolio management approach in which a broadly diversified core portfolio (core) is augmented by more specific individual investments (satellites). Satellite investments are often thematic investment styles. These include, for example, sustainable investments, or investments in individual sectors or countries. This approach is primarily used in professional wealth management.
Where is the core-satellite approach worthwhile?
The core-satellite approach is particularly useful if you are pursuing different savings goals that differ in terms of risk tolerance and investment horizon.
Private pension provision is often the investment goal with the longest investment horizon. After all, retirement age is often still decades away.
Private pension provision is what represents the core portfolio for most investors. In order not to jeopardise this, a solid, broadly diversified portfolio is important, which can be maintained as far as possible until retirement age without major upheavals.
In order not to mix other investment goals with retirement provisions, satellite portfolios are an ideal option.
For example, if you are saving money for your grandchildren or want to pursue a specific investment trend in the short term, you would prefer to do this in a separate custody account.
What does the core portfolio invest in?
Since the core portfolio represents the heart of the investment and is often designed for a holding period of more than ten years, the portfolio should be put together against the background of a balanced risk-return profile.
Large and unnecessary (concentration) risks should be avoided. Rather, the core portfolio should be broadly diversified and make use of all traditional asset classes. These include equities, bonds, real estate and commodities.
The portfolio should be as "timeless" as possible. Trend topics, which often only have a short lifespan, have no place in the core portfolio. The costs of the investment products used are also of great relevance here, which is why ETFs are particularly suitable.
What to look out for with the core portfolio:
Broad diversification across sectors, regions and asset classes
Balanced risk-return profile according to the investment objective
No speculative or short-term investments
Use of cost-effective building blocks such as ETFs
The investment products should have high (legal) security and protection against insolvency and be regulated by an official body
High transparency of the investment product with regard to the contained securities and investment guidelines
What are typical satellite investments?
Satellites may differ from the core portfolio in terms of investment components and risk. For those who pursue goals such as sustainable investment, which are very close to their hearts, diversification can also be dispensed with in the case of satellites and higher risks can be accepted.
Thematic investments or trend topics of particular personal interest are also conceivable as satellites. For some investors, for example, it is important to have shares in the company they work for in their portfolio. This can also represent a satellite investment.
Satellite portfolios can consist of the same traditional asset classes as the core portfolio. However, they can also invest in alternative asset classes.
These are typical satellite investments:
Sustainable investing and impact investing
Thematic investments such as cybersecurity, Industry 4.0 or dividend stocks
Factor investing such as Value (investing in low-valued companies), Size (investing in small companies) or Momentum (following price trends)
Short-term liquidity management via very conservative investments such as money market funds
Exotic asset classes such as art, cryptocurrencies, ship funds or wine
Shares in your own employer or other individual stocks
Unconventional (active) investment strategies such as hedge funds, private equity, options, convertible bonds
What to look out for in satellite portfolios
Satellites are always only a complement to the core portfolio. This means that the core portfolio should make up the majority of the overall portfolio. Satellites should never replace, dominate or even jeopardise the core portfolio.
Speculative investments as satellite portfolios are acceptable. However, these should not exceed 10% of the overall portfolio. Speculative investments include those with increased risk such as thematic investments, illiquid assets such as art, unregulated asset classes such as cryptocurrencies or shares in one's own employer.
The latter should be treated with particular caution. If the employer runs into financial difficulties, not only is your own job at risk, but also your securities account.
The choice of satellites should therefore always be made in the context of an investor's overall financial situation. Like the core portfolio, they should be in line with the investor's savings goals and risk profile.