Investment Professionals

Investing for better outcomes

How to build your clients’ portfolios to meet their goals

The unpredictable nature of markets means that advisers need to be pragmatic and measured in their approach to meeting their clients’ goals, ranging from building a house deposit and paying for education to generating a consistent retirement income while maintaining enough capital for aged care deposits. Whatever the goals, most advisers typically need to be able to preserve a certain level of capital for their clients, while also investing for long term growth or for stable income.

An enhanced core-satellite approach to portfolio construction can offer a cost-efficient and measured way to target investment goals and manage market volatility.

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What is enhanced core-satellite investing?

In enhanced core-satellite investing, the core is made up of passive exposures, including smart beta, to major asset classes (mainly equities and fixed income) while satellite investments are more opportunistic and designed to seek specific growth outcomes, sometimes at higher levels of risk. Satellite investments might traditionally have been active managed funds or direct investments in companies or real estate but are now equally likely to be selected from the tailored ETFs available today.

Generally, the core might be 65-85% of the portfolio, depending on the investor’s goals, investment horizon and risk tolerance, while satellites would represent 15-35%[1].

How this might look in practice is as follows: an investor focused on income might use the satellite components for yield or proactively switch to defensive or growth tilts to bolster their core investments, depending on market conditions. Their core might include investments such as ETFS S&P/ASX 300 High Yield Plus ETF (ASX code: ZYAU) or ETFS EURO STOXX 50 ETF (ASX code: ESTX). In the current market conditions, the investor might choose to increase exposure to defensive investments to the satellite like ETFS Physical Gold (ASX code: GOLD), or include an exposure to foreign currencies like the US dollar which offer a higher yield compared to the Australian via an ETF like ETFS Enhanced USD Cash ETF (ZUSD).

How enhanced core-satellite investing supports client needs and goals?

Core-satellite investing is a flexible approach and the core will look different according to the individual investor. A high growth strategy might have a core with a higher proportion of ‘riskier’ assets like equities, while a defensive strategy might focus more on assets like gold or fixed income. Investors should consider the core as where they set their strategic asset allocation – where the long-term targets are set for the investment composition to meet your goals, needs and views. By contrast, the satellite is for tactical asset allocation – for shorter-term investments based on market and world conditions that are likely to be more temporary. [Learn about how core-satellite investing has worked during the COVID-19 pandemic here]

Core-satellite portfolio construction also assists in cost management for investors. Passive investing is typically lower cost when compared to actively managed funds. Using ETFs may offer additional pricing efficiencies for investors, such as lower administration and management fees as well as lower entry point compared to managed funds and listed investment trusts.

Other considerations from using ETFs may be benefits from liquidity which can assist in flexibility to move based on market conditions or to free up funds to meet specific cash needs. There is also a wide range of ETFs available, assisting advisers in identifying those which may fill specific portfolio gaps, match specific goals or even meet particular views held by clients.

For more information on enhanced core-satellite portfolio construction or to find out more about using our range of ETFs in your portfolio, speak to ETF Securities.