Do you want to add some spice to your portfolio? Well, satellite funds can be the perfect way to inject some specialised exposure and potentially boost returns. But what’s worth considering, and is it worth the risk? In this article, we highlight some of the benefits of this approach and suggest some funds worth considering.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
What are satellite funds?
They’re referred to as satellites as they complement an investor’s core, lower-risk portfolio. Their aim is to provide diversification and (hopefully) enhance returns. Satellite holdings come in different guises. Some offer exposure to specialist long-term trends, while others focus on companies operating in a single country. You can also use funds that concentrate on particular industries as satellite holdings, as well as those that invest only in smaller, innovative businesses.
Pros and cons
The main benefits are diversification, exposure to interesting, innovative and growing areas of the market, and potentially higher returns. Many investors will use a satellite strategy to introduce higher-risk exposure into their portfolios to boost returns while limiting potential downside. However, such investors must still accept increased volatility. Being involved in more unpredictable areas means most investors won’t want to invest every penny into them.
Getting the allocation right
An asset allocation to satellites of 10% to 30% is enough to diversify a portfolio and potentially enhance returns. Of course, the actual percentage depends on an investor’s circumstances, financial goals, existing investments and overall attitude to risk. For example, more aggressive investors with longer investment horizons may prefer to allocate 40% of their portfolios to satellite positions.
How it might look in practice
We have divided potential satellite funds into four key areas and selected some interesting funds from the Chelsea Selection to illustrate the potential of this type of portfolio construction.
- Themes
- Sectors
- Small-caps
- Countries
Themes
Funds with a thematic focus aim to benefit from exciting trends that are likely to change how we live, and one contender is Landseer Global Artificial Intelligence. Not only does this fund invest in businesses actively using AI to gain a competitive advantage, it also uses this technology to find such opportunities.
Insurance is another multi-year theme. Virtually everything around us is insured – cars, houses, mobile phones – and the industry continues to enjoy strong demand. The Polar Capital Global Insurance fund is a great way to access this area. It has a management team that has worked in insurance for years and boasts a consistent track record, generating a positive return for investors in nine of the past ten years*.
Sectors
Investors looking for attractive satellite holdings will also consider sectors. An example is infrastructure, which includes everything needed to support modern economies. A global investment of $106 trillion will be needed to support improvements in transport links, energy and power, digital and other areas, according to McKinsey**. The FTF ClearBridge Global Infrastructure Income fund benefits from an attractive yield, strong long-term performance and an experienced management team at the helm. Elsewhere, TM Gravis UK Infrastructure Income buys investment trusts that are exposed to different types of UK infrastructure, such as railways, roads and solar power.
Small-caps
Smaller, growing companies have higher long-term growth potential because they’re often at a much earlier stage in their development. They are also involved in exciting new areas. The T. Rowe Price US Smaller Companies Equity fund has a flexible approach to finding attractive small and medium-sized companies in the United States. Investors wanting smaller opportunities closer to home could consider Liontrust UK Micro-Cap. It aims for capital growth over the long term, which it classes as being at least five years.
Countries and regions
Another popular route is to invest in single-country funds, particularly in more emerging areas with higher potential upside and greater volatility. We like the passion of M&G Japan’s lead manager Carl Vine. He really understands the Japanese businesses he invests in, thanks to his in-depth research. Reasons to consider Japanese exposure include the country’s corporate governance revolution, technological innovation and undervalued businesses.
There’s also the Goldman Sachs India Equity Portfolio. The aim of this fund is to capture the growth potential of the Indian economy. The team’s ability to meet companies on the ground in India set it apart from many of its rivals in this sector. It also considers businesses of all sizes.
Finally, another satellite approach could be to buy an emerging market fund that provides exposure to the developing regions of the world. Invesco Emerging Markets ex China consists of around 50 best ideas from countries that include South Korea, Taiwan, India, Brazil and South Africa.
