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What’s the best way to grow your assets? Of course, we all know that there’s no magic formula, only strategies that can be adjusted based on your financial situation, future projects, and risk tolerance. Among these strategies, do you know about the “core-satellite” method? Here’s what you need to know.

Reaching goals while protecting your net worth

Generally speaking, the investor or professional advisor who adopts the core-satellite method builds the portfolio around a core of basic assets – mostly passive and following the main indices, such as the S&P 500. This is the core of the portfolio.

The satellite portion is made up of more actively managed investments, which carry greater risk than the more passive core, but have the potential for greater returns.

The key for a good portfolio manager is to have the assets in the portfolio working together in a way that both encourages strong performance and keeps clients within their comfort zones.

“The arrangement of the core and satellite investments will mostly depend on the client’s risk tolerance and their personal situation,” says Alexandre Viau, Vice President of Private Banking 1859, a division of the National Bank. “If a client isn’t comfortable with an asset class, it probably isn’t a good choice for them.”

“It’s like building a hockey team,” he says. Mr. Viau illustrates the role of the core assets by asking a question. “You know Carey Price, the Montreal Canadiens’ star goalie? He’s important to the team, but Carey Price doesn’t score the goals.”

Who is the core-satellite method for?

Core-satellite portfolios are one of the investment strategies that are particularly well-suited to wealthy and ultra-high-net-worth clients. These clients want to protect their assets at all costs, but can afford to take risks with a small percentage of their so-called “satellite” investments. The percentage of assets that will form the core of the portfolio will depend on the client’s liquidity requirements and their risk profile. “In general, it varies between 75 and 100%,” notes Alexandre Viau.

Different cases, different strategies

“A core-satellite strategy is an update of an earlier strategy called “core-and-explore, says Toronto financial author Sandra Foster. With this approach, the satellite holdings were mostly invested in emerging markets.”

“Today, the core of the portfolio will usually consist of investments in infrastructure, direct real estate, or private equity. The satellite investments will be added to increase diversification, risk and, hopefully, the long-term performance.” For example, it could be targeted in infrastructure investments or real estate. These assets usually require a higher initial investment and are less liquid. 

Another way to look at a core-satellite strategy is to consider it as a form of “mental accounting,” says George Christison, a British Columbia-based retirement and financial planner and founder of IFM Planning Services and the InvestingForMe.com website. “We divide our savings into different pots and assign different jobs or purposes to each pot,” he says.

“For most investors, the main difference will be the proportion of their whole portfolio that they assign to the core portion, adds Mr. Christison. The more conservative the investor and the higher the investment income they will require, the higher the percentage assigned to the core.”

He recalls one investor who was in her 40s and ran a successful business that generated $20,000 a month in investible profit. “Her goals dictated that her core portion should represent 90 per cent [of her portfolio] and be invested only in bonds,” he says. “She achieved her financial goal in 12 years, five years earlier than she planned.”

Music to your clients’ ears

“A portfolio is the sum of the different asset classes,” concludes Alexandre Viau. “It’s a bit like when you’re attending a concert: you hear all the instruments in the orchestra, not just the piano, the violins, or the brass section. In much the same way, a portfolio forms a whole. It shouldn’t be analyzed by focusing on a single asset class.” This is a principle that fits in perfectly with the core-satellite method… as long as you have an advisor who like an orchestra conductor is capable of leading well!

Do you have significant assets to manage or questions about your investments? Make an appointment with an advisor at Private Banking 1859 today. They will offer you strategies for achieving your long-term goals while controlling the risk to which your portfolio is exposed.

This article is offered by National Bank