Core-satellite investment – What it is, definition and concept | 2023

The core-satellite investment is one in which we constitute a mixed portfolio of asymmetric capitalization in which the core will be made up of passively managed and satellite indexed products, with active participation investments.

Therefore, in the center or core, what we do is create an investment portfolio in assets that require minimal management. Hence, they are called passive management, since they practically work alone.

For its part, the satellite will focus on riskier financial products. These will need more time to manage them, apart from seeking returns that are higher than the market. Hence they are called active participation.

Core satellite investment and the Pareto rule

Pareto’s law or rule, also called 80-20, tells us that the best performance of an activity usually occurs in the least amount of time dedicated to it. In other words, 20% of your work time affects 80% of your performance.

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This rule applies in marketing, 20% of customers generate 80% of income, or core-satellite investment. It is recommended that between 70% and 80% of the investment be in the core and the rest in the satellite. In this way, safety will come first, even if we earn less.

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Of course, these two percentages may vary depending on the investor profile or the financial education received. For someone risky, a 60-40 may be interesting, while a conservative person would opt for an 80-20. An intermediate profile would be a 70-30.

Advantages of core-satellite investment

Let’s see some advantages of this investment strategy:

  • The costs of passively managed assets are very low and can help minimize investor expenses.
  • Both complement each other. The first offers the security to be able to risk in the second. In this way, we have guaranteed income and we will be able to invest more calmly.
  • The passive indexing of the core allows organically replicating the markets, while the active participation of the satellite allows to get ahead of them.
  • In reality, it is a diversified portfolio, with long-term majority investments and short-term minority investments. For that reason, you benefit from both.
  • Both portfolios have a different rotation. The core one is very low and allows fewer commissions. However, that of the satellite is very high.

Core-satellite investment products

To finish, we are going to give an example of a portfolio in which an investment strategy like this is carried out.

  • At the core we will have passive indexed products. A typical product is index funds. The goal is stability and security.
  • In the other part of the core satellite investment we will have products that require active management and are more risky. For example, commodities, real estate, or high-yield bonds.

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