Core and Satellite Investing: A Practical Way to Blend Active and Passive

Introduction: Making Sense of the Investment Landscape

In today’s investment landscape, the loudest voices often get the most attention, regardless of whether they represent the majority view. We see this in politics and increasingly in fund management, with the growing popularity of low-cost, passive investment strategies.

But the real challenge isn’t choosing one side over the other. It’s finding the right balance. For financial planners and self-directed investors alike, blending different investment styles—rather than choosing between them—can lead to better outcomes.

That’s where the core and satellite approach comes in.

What Is Core and Satellite Investing?

Think of the solar system: at the centre is the sun—the core—while the planets orbit around it. Your investment portfolio can work the same way.

In this strategy, the core is typically built from low-cost, broad-market exposures, often passive in nature. Around this core, you place satellites: more tactical, thematic, or opportunistic investments aimed at enhancing returns or diversifying risk.

Benefits of the Core and Satellite Approach

• Diversification: Blends different asset classes, sectors, and styles

• Cost Control: Keeps overall portfolio fees lower by using passive funds at the core

• Alpha Potential: Satellites provide room for active managers or niche strategies to outperform

• Behavioural Discipline: A stable core can help investors stay invested during market volatility

How to Build a Core and Satellite Portfolio

1. Establish Your Core

• Usually composed of global equity or multi-asset passive funds (e.g., MSCI World, FTSE All-World)

• Focused on efficient market exposure, simplicity, and low cost

  
  

2. Select Your Satellites

• Examples include:

  • Thematic funds (AI, clean energy)

  • Active fixed income or income-focused strategies

  • Emerging markets or small-cap active funds

  • Style-based tilts (value vs growth)

• Aim to capture areas where active managers are more likely to add value

  
  

3. Determine Weightings

• A common split is: Core = 60–80%, Satellites = 20–40%

• This can be adjusted based on investor risk tolerance, goals, and the strength of conviction in active strategies

Common Pitfalls to Avoid

• Over-diversifying: Too many satellite positions can dilute the overall portfolio impact

• Chasing performance: Switching strategies based on short-term trends undermines discipline

• Neglecting the core: Losing sight of the long-term strategy by focusing too much on tactical plays

Example Portfolio Insights

Constructing a core and satellite portfolio isn’t about picking random funds—it requires research and intention.

• Fixed Income: Often better served by active managers who can navigate duration, credit, and sector risks.

• Global Equities: Passive funds can work well, but they often have regional or sector biases. Blending with an active global equity fund can improve balance.

• US Equities: Highly efficient markets favour passive, but small-cap active strategies may still provide an edge.

  
  

The takeaway? Strategic blending doesn’t necessarily mean significantly higher costs. But it can offer the potential for better long-term outcomes.

Is This Approach Right for You or Your Clients?

This strategy won’t suit everyone. If your objective is to keep costs ultra-low and you’re content with average market returns, a fully passive approach may be more appropriate.

But core and satellite investing can be ideal for those who:

• Believe in active management but want to keep costs under control

• Are comfortable monitoring and adjusting parts of their portfolio

• Value a structured, disciplined framework for long-term investing

Conclusion: Balance with Flexibility

The debate between active and passive is often unhelpfully binary. In truth, it’s not about choosing one over the other—it’s about combining them thoughtfully. A core and satellite strategy brings structure, cost efficiency, and the opportunity to improve returns.

And remember, just 1% extra return annually—after fees—compounded over 20 years can make a profound difference to long-term wealth.