A "Core/Satellite" approach to investing is an extremely popular form of structuring a client's portfolio - and is used by 50Plus within a number of it's non superannuation model portfolios. 

In order to understand core/satellite investing in the context of the 50Plus model portfolios, its important you first understand the difference between index (passive) investment management and active investment management.

Firstly, lets take a look at "passive/index" investment management;

Index (passive) investment managers invest their respective portfolios with a view to generating a return that tracks a specific index. For example, many of the Australian share index funds track the ASX 200 or ASX 300 Index. These indexes plot the daily combined movement in the top 200 and 300 stocks listed on the Australian Stock Exchange (ASX). Whilst we have used the ASX 200 & ASX 300 in our example, there are many other indexes which plot the movement of listed share prices. There is also a large number of international equity indexes, as well as indexes that measure the movements in bonds, property, cash, etc.

Some of the characteristics of a fund which aims to generate index returns are;

• returns are likely to be very close to the return of a specific target index
• investment management fees will generally be lower than the fees charged by active managers
• the turnover of the fund will generally be lower than the turnover of an actively managed fund - which may reduce any capital gains tax on realised gains.
• the underlying assets of the fund and the decisions to buy or sell those assets is managed in the main by a computer, ie there is little human intervention in the stock selection process.

Let's now have a look at the term Active Management...

Active investment managers invest their respective portfolio with the objective to outperform a target benchmark - typically, an index of some sort (ASX 200, ASX 300, MSCI, etc). For example, an active manager may decribe the objective of their fund is to outperform the ASX 200. In this example, the managers of the fund would be stating to prospective investors that this is the objective of the fund - to outperform the ASX 200.

Some of the characteristics of an actively managed fund are;

• investment management fees tend to be higher than the fees charged by active managers
• the turnover of the fund tends to be higher when compared with the turnover of active managers - which may lead to greater capital gains tax/losses on realised gains/losses.
• the underlying assets of the fund and the decisions to buy or sell those assets is determined by a team of investment managers.

Fundamentally, active managers are of the view that they can generate above market (index) returns through superior stock selection.

Now that you understand the differences between index and active managers, it is now time to take a closer look at Core/Satellite investing and what it means to you.

Core/Satellite Investing...

Core/Satellite investing describes a situation where the largest proportion of the fund is invested in such a way as to generate market returns. This component of the fund is referred to as the "Core Component", and will generally involve the use of index managers or assets which make up a particular index.

In order to potentially increase the overall fund return, a core/satellite approach to investing will also include the use of actively managed assets - through an active manager, or purchased directly. This actively managed component will generally be much smaller in size than the Core component.

Why mix index and active managers?

By mixing index managers with active managers, the potential outcome may be enhanced. Put another way, a core/satellite approach may increase the market return - through the use of professional investment managers. correlation

There is considerable material that explains the benefits of a Core/Satellite approach to investing - which is available on request from 50Plus.