How to use satellite funds effectively

We often talk about a fund making a good ‘core’ investment – a fund you can have at the centre of your portfolio — this fund forms a solid base for your savings. For someone just starting out, you may hold one or two core funds as the basis of your ISA portfolio for a number of years. 

Then, as our portfolios grow in value and/or our confidence increases, we tend to add satellite investments to our portfolios. These tend to be more niche funds that have the potential to add something a little extra to our portfolios.

New to the core/satellite approach? Our core and satellite guide breaks down all the key concepts, advantages and disadvantages.

Three different ways to use your satellite allocation

It’s important to remember there’s no hard and fast rule when it comes to satellite investments. These funds could be added to provide extra income, extra diversification, or extra growth. This typically means you’re looking at equities to add either more risk or diversification to your portfolio, or fixed income for added income.

1. Adding regional exposure

For many, the core portion of their portfolio will consist of global or UK equity exposure. Therefore, one easy way to add some added diversification using a satellite position is to look at regionally-focused funds. With global markets heavily concentrated in US equities and technology, we will consider regions such as Asia and Europe for added diversification. 

Let’s look at Asia first. The Asia Pacific region is home to some of the world’s fastest-growing economies. However, this region is not homogeneous; there is considerable variation in economic performance and stock market returns among different countries. This means that investing in Asia offers a range of opportunities and challenges. There are any number of exceptional funds in Asia, including Fidelity Asia Pacific Opportunities, Invesco Asian and Schroder Asian Alpha Plus, which all have excellent long-term track records in the region.

An option closer to home is Europe. Europe is a fascinating place packed full of remarkable countries and world-class companies operating in a wide variety of sectors. Whether you’re seeking income, value, or long-term expansion, Europe presents an intriguing case for investment. We’d highlight funds such as CT European Select, Liontrust European Dynamic and Montanaro European Income for those looking to add more European exposure to their portfolio.

2. Looking for something specialist

The IA Specialist sector is a bit like the Wild West for funds. It includes funds focusing on financial stocks, niche country funds, such as Korea or Emerging Europe, plus infrastructure or commodities funds. It also can exclude a number of specialist areas that investors might want to consider, such as healthcare or property. 

Although specialist areas such as healthcare, technology or financials may be represented in your core fund allocation, adding an additional niche fund will allow you to super-charge your exposure in areas of particular interest.

The Jupiter Financial Opportunities fund is an excellent diversifier to any portfolio. The fund is a concentrated portfolio of ideas, which include not only banks but the likes of payment providers, asset managers, platforms and stock exchanges, offering a direct route to capitalise on the industry’s performance.

Infrastructure is another great diversifier in a portfolio. These funds tap into the steady growth potential of essential facilities such as transportation and utilities, while also offering a high income that grows in line with inflation. Alex Araujo, manager of the M&G Global Listed Infrastructure fund, shares why infrastructure should be a key component of an investor’s portfolio in a recent episode of the Investing on the go podcast. 

3. Generating an income

Those investors looking to generate income will focus primarily on investing in dividend-paying stocks, or equity income funds as their core exposure. However, additional satellite positions can be added in more niche areas of the market to help supplement this income.

If you’re looking for equities, the Schroder Asian Income fund or Guinness Asian Equity Income both offer regional income exposure to investors looking to diversify, while the Fidelity Global Dividend or JPM Global Equity Income funds would give overarching global exposure to your portfolio.

Another option is adding fixed income to your portfolio. Fixed income has become a viable investment option in the past couple of years as investors have welcomed the end of quantitative easing and the presence of more attractive all-in yields in the bond market.

If you want to take very little risk, you can buy short-dated government bonds. By contrast, if you want a higher yield and greater capital returns, you might want to consider a corporate or even a high yield portfolio. Two funds that fit the bill are Man High Yield Opportunities or Aegon High Yield Bond. A more global approach would include the Artemis Global High Yield Bond fund.

Finally, an emerging market bond fund, such as M&G Global Emerging Markets Bond or the BlueBay Emerging Market Unconstrained Bond, helps diversify your portfolio beyond simply developed markets and can tick two considerations: income and regional exposure.