How to build an efficient investment portfolio: Core-Satellite approach

How to build an efficient investment portfolio: Core-Satellite approach

What is the "Core-Satellite" investment?

It is a portfolio building method designed to minimize market volatility, while creating an opportunity to surpass the stock market benchmark. The object is to create a core portfolio with a few smaller portfolios also called as satellites.

The Core portfolio will typically be between 50% and 90% of the global portfolio and will consist of medium and long-term investments that track the main stock and bond markets.

Satellite portfolios will account for the remaining 10% to 50% of the global portfolio and will consist of asset that are actively managed to seek for higher potential profits. Satellite portfolios can also provide hedging opportunities for the core portfolio during periods of stock market decline.

Core Portfolio

Below is a list of typical asset classes that can be considered as core investments.

Bonds: Passive investors usually use bonds to generate stable earnings. The investment risk of this asset is considered to be low and generates predictable income sources.

Shares: Stock markets are secondary markets where existing owners can trade with potential buyers. A two-sided market consists of "bid" (buyer) and "offer" (the seller).

ETFs: have generated a significant portion of fund flows over the past two decades. ETFs operate as investment trusts and reset at regular intervals; however, ETFs differ in their ability to be traded freely on a stock exchange during an ordinary trading day.

Here are some specific trading strategies that can be used in the core portfolio:

Value Investing:

This involves identifying shares that are considered to be "underestimated" by the market and are usually traded at a low P / E (price / earnings), or P / B (price / book) multiple.

Investors are looking to take advantage of the perceived irrational movements in stock prices, which could be caused by an over-reaction generated by a profit warning, broker downgrade, or unfavorable background news flow.

Dividend Investing:

Dividend Investing. The strategy gives an investor the opportunity to create a consistent and reliable revenue stream, of course impregnated with the potential profit gained from the increase of the share price.

The objective is to identify companies that offer considerable dividends and are traded at attractive values. In 2018, the average dividend yield in the FTSE 100 in the UK averaged over 5% per year.

Discretionary Portfolio:

Clear Capital Markets manages such a long-term discretionary portfolio. The strategy is based on a quantitative selection model that evaluates companies using 20 unique metric investment values.

The actions identified in the previous process (using the quantitative selection model) are subsequently subjected to an additional layer of technical validation by our analysis and research team before the final investment decision is made.

The companies analyzed are part of the FTSE100 index to ensure we only invest in the most liquid assets. The portfolio is rebalanced monthly to keep stock selections up-to-date.
— says Calin Nechifor - Senior Partner at Clear Capital Markets, London.

Range Trading:

It identifies when an asset is traded between high and low prices consistently for a finite amount of time. If a stock is traded constantly within a well-established range, then an investor can buy when the price reaches a technical support and sells when the price reaches a technical resistance.

Momentum Trading:

The strategy seeks to take advantage of the market volatility by opening short positions in stocks that are in a strong upward trend and subsequently selling when identifying signs of losing momentum.

Usually, the investor will move the capital from trading by opening a new position based on the current strategy. In order to succeed in synchronizing moment waves, it is especially important to have robust risk management controls on positions and to use stop loss along with profit margins.

Satellite Portfolios

Here is a list of typical asset classes that can be considered as investments in satellite strategy:

Small Cap or AIM:

Small businesses have huge potential for growth. The most successful big companies have started in the past as a small business.

They offer investors the opportunity to enter at a relatively low price level. Generally, these companies have a tendency to deploy new technologies, services, or products on the market.

However, there is a risk of both business failure and volatility of the stock market. Therefore, we can expect high potential returns, but that come in a high-risk package.

IPOs:

Initial Public Offering (IPO) is the way a company offers for the first time shares to potential investors on the stock exchange. The IPO can provide an excellent opportunity to support the company on its first day of public trading.

Index Trading:

A stock index is an extremely important component of financial markets.

However, it reflects only a number representing the cumulative value of the shares of a stock market.

Investors can open long or short positions, based on an index as an underlying asset. When it comes to stock market trading, it is very important to manage the risk. This can be done by using stop loss or (Call and Put) options.

CFDs:

Can be used to implement a variety of trading strategies.

Every investor is unique. The Core Satelite approach is one of the existing models in the market and can be a real help in building a medium or long term investment plan. It is advisable to have a risk profile before any investment decision is made.

Know Your Client (KYC) document is the initial process of identifying a detailed perspective on investor behavior, risk tolerance and investment expectations.

By completing the risk profile, we can also assess the customer's tolerance to negative results. Unfortunately, economic cycles are increasingly difficult to predict, and the value of the portfolio is often affected by a cumulus of factors. Therefore, past performance can not be a guarantee for future performance

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