What is core-satellite investment and how it can help grow your portfolio

This quote holds significance, especially in building a balanced portfolio that provides growth prospects along with stability in the long run. One way to achieve this is to utilise core satellite investing.

Developed in 1973 by US economists Fischer Black and Jack Treynor—who also created the CAPM model—core satellite investing blends active and passive investment strategies. This approach is rooted in the modern portfolio theory (MPT) introduced by Harry Markowitz in the 1950s, emphasising diversification and strategic asset allocation.

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Initially popular among institutional investors in the 1990s, core satellite investing gained traction with retail investors in the 2000s, especially with the rise of index funds and exchange-traded funds (ETFs). By tailoring the strategy to their risk appetite and financial goals, investors can effectively balance stability and growth.

Achieving financial goals 

The core-satellite investment approach is a portfolio management strategy that divides investments into two distinct components: the core and the satellite.

The core comprises 60-80% of the portfolio and consists of stable, low-cost investments that track broad market indices. This core consists of investment instruments such as index funds, ETFs, and blue chip stocks.

On the other hand, the satellite portion, comprising 20-40% of the portfolio, is allocated to specialised, actively managed investments designed to enhance returns or meet specific investment objectives. This segment may include exposure to particular sectors, markets, thematic funds, or alternative asset classes, allowing investors to capitalise on emerging opportunities and market trends.

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The core-satellite approach also aligns with the efficient market hypothesis (EMH), which suggests that it’s difficult to consistently beat the market. As a result, a large portion of the portfolio (the core) is invested to match market returns at low cost. While the core provides stability, the satellite component of the portfolio aims to increase returns and capitalise on specific market opportunities.

It is important for investors to conduct thorough research and analysis to identify potential outperformers or undervalued assets.

How to balance core and satellite portfolio allocation?

One of the most critical aspects of implementing a core-satellite strategy is determining the appropriate allocation between core and satellite investments. 

This balance depends on several factors such as risk tolerance level (risk-averse investors may opt for a larger core allocation), investment goals (growth-oriented investors might allocate more to satellite investments), and market conditions.

Common allocation models include:

● 80/20: 80% core, 20% satellite (more conservative)

● 70/30: 70% core, 30% satellite (balanced)

● 60/40: 60% core, 40% satellite (more aggressive)

During bull markets, the core component captures broad market gains, while satellites can target high-growth sectors. On the contrary, during bear markets, the core provides stability, while some satellite investments (for example, defensive sectors or alternative assets) may offer downside protection.

It’s important to note that these ratios are not fixed and can be adjusted based on individual circumstances and market conditions. Investors can adjust their core-satellite allocation or shift satellite investments based on their market outlook. However, it’s crucial to maintain a long-term perspective and avoid frequent, reactionary changes.

Let’s understand with an example. 

Rajesh Kumar, a 35-year-old IT professional from Bangalore, adopted a core-satellite investment strategy in 2015. His portfolio consisted of 70% core investments in a bluechip fund, flexicap fund, and index funds. While his 30% satellite investment includes mid cap, small cap, and sectoral funds.

He invested ₹10 lakh ( ₹7 lakh in core and ₹3 lakh in satellite). If his core portfolio gave an annual return of 8% and his satellite portfolio delivered an average return of 12.50%, his investments would reach ₹15.11 lakh and ₹9.74 lakh, respectively. The total portfolio value will reach ₹24.85 lakh in 10 years.

However, the same investment strategy may vary as per individual preferences. Also, the return may deviate based on the choice of investment avenue and market condition. The key is to stay invested for the long term so the short-term market noise can be mitigated.

Core satellite investing is about diversification and efficient asset allocation between active and passive investments. Investors benefit from stability, cost-effectiveness, and flexibility of asset allocation via this strategy.

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Investors can consider this strategy based on their goals and regularly monitor their portfolio to ensure it matches market conditions and the current financial situation.

Atul Shinghal, founder and CEO, Scripbox.