Indexing

Core-satellite strategy

The core-satellite strategy is a way of incorporating actively managed funds and other investments into your portfolio while reducing risk and costs.

This strategy appeals to investors who are attracted to the distinct philosophies of active managers, or those who like to invest directly in shares themselves, but prefer a lower risk strategy. It works just as well in diversified investment strategies as it does in single sector ones.

You start with a core of single sector or diversified index funds. You then add individual shares or actively managed funds (the satellites) commensurate with the level of risk and diversification you want to achieve.

Many financial advisers use a diversified index fund to achieve their client's asset allocation and add a combination of lowly correlated active funds as the satellites.

Using low-cost index funds as the core strategy can be an efficient way to implement your asset allocation and reduce your overall costs of investing.

It's important to remember that choosing active managers requires a great degree of skill and diligence. Consistently outperforming the benchmark is very difficult to do.

For those that enjoy the challenge of trying to pick winning active managers, the core-satellite strategy might be worth a consideration.

Indexing can be a powerful strategy when used alone or mixed with active fund managers. In fact, many investment experts believe indexing is the best starting point for any investment strategy. This explains why seven out of Australia's top 10 super funds use indexing in their portfolios.