How to pick the right satellite fund

offer the possibility of enhanced investment returns. Core/satellite is an investment strategy that sees most of your money held in reliable, stable positions and the rest in riskier names that could spring a positive surprise. But what constitutes a satellite fund – and how should you choose one? In this article we look at the qualities they possess and highlight some portfolios worth considering.

Qualities of a satellite

Let’s start with the definition of a satellite fund. It’s a portfolio that invests in companies, industries or geographies that are attractive – but also more unpredictable. This could be due to the size of the businesses, the fledgling nature of its particular industry or the fact it’s an emerging market without as much regulatory scrutiny as more established areas. This means that while satellites have the potential to outperform expectations and give your overall portfolio a welcome boost, the investment journey is likely to be volatile. Therefore, they’re not areas in which most investors would feel comfortable placing their entire life’s savings but can provide an exciting extra dimension.

Geographies

Our first satellites are funds focusing on under-researched parts of the world that may have more unsettled economies, fewer regulatory controls or unstable political backdrops. These will generally be global emerging markets, which usually include the likes of China, South Korea, Brazil, India and Indonesia. 

If you’re looking for a broad spread of country exposures, then Invesco Global Emerging Markets consists of around 50 best ideas from across these regions. This fund has a genuinely unconstrained investment approach and experienced management team that has helped it achieve an outstanding long-term track record.

It’s also possible to take a more focussed approach by opting for a country-specific fund and one great example is Goldman Sachs India Equity Portfolio. This is an all-weather India fund with a solid investment process. We particularly like how the team behind it, which is based in Asia, emphasises meeting company managements.

Of course, you mustn’t overlook China as it’s still a global powerhouse despite being regarded as an emerging economy. FSSA All China is a good option to access this country. This flexible fund can invest across the entire market, including A-shares, which gives it an advantage over many rivals in this competitive space.

It’s not just emerging areas that offer potential. For example, Japan has endured economically-chequered periods but has more recently introduced corporate governance reforms. A fund we like in this area is Baillie Gifford Japanese, which has succeeded in delivering outstanding returns during difficult market conditions. The investment team, led by Matthew Brett, focuses on well-managed business with strong competitive advantages that aren’t overpriced. 

Sectors

Another approach taken by satellite investors is getting exposure to a particular sector such as healthcare or financials. Sometimes the lure is in snapping up companies for cut price valuations due to specific problems affecting their particular sector. However, they don’t have to be navigating problems. A satellite position can purely mean an investor is looking for more exposure to that particular area.

There are obviously plenty of different sectors but healthcare/pharmaceutical is experiencing phenomenal growth due to advances in medicine and an ageing global population. The Polar Capital Global Healthcare Trust invests in companies operating within pharmaceuticals, biotechnology, medical technology and healthcare services.

Infrastructure is another interesting growth area. This includes everything from the building of roads and railways to water treatment plants and mobile phone towers. We like M&G Global Listed Infrastructure as it invests in payment companies and data centres, as well as more traditional areas. Lead manager Alex Araujo favours companies with critical physical infrastructure, long-term concessions or perpetual royalties.

The world of finance is another booming sector and crucial to virtually every country, company and person in the world. Its sub-sectors include banks, capital markets and financial services. The Jupiter Financial Opportunities fund, which aims to provide capital growth over the long term, benefits from the expertise of lead manager Guy de Blonay. He prefers businesses with sustainable growth characteristics and identifies them with a thematic eye that considers wider economic trends and how they’re likely to impact financial services. 

Industries

It’s also possible to take an even more specific approach when it comes to satellites by looking at funds that concentrate on industries within sectors. Take the Polar Capital Global Insurance fund as an example. While obviously part of the wider financial sector, it concentrates on insurance – as its name implies. It’s designed to provide exposure to non-life insurance companies, which is a rather specialist and undervalued part of the market. It boasts a consistent track record and good return profile.

Elsewhere, WS Amati Strategic Metals is part of the broader commodities sector and provides capital growth by investing in internationally-listed mining companies. Its focus is on metals that have a strategic importance to the global economy, such as gold, copper, silver and lithium.

Companies

Satellite positions can also be based on company size. For example, smaller listed firms often outperform larger-cap cousins over longer periods but can be extremely volatile. For example, they may be innovative businesses that are growing at a rapid rate but have a technology or process that’s not been universally proven. The good news is there’s no shortage of such companies. A great way to access them is via a fund that looks for the most interesting opportunities within particular regions.

Janus Henderson European Smaller Companies buys growth companies at a reasonable price and also looks at neglected areas of the market. As its name suggests, the focus here is on Europe. We particularly like how its managers are willing to invest in the smallest of companies as this area may contain hidden gems that have been overlooked by their rivals.

If you want a wider spread of names then the Global Smaller Companies Trust is worth considering as it has a truly international focus. Similarly, we are long-term believers in the UK Smaller Companies story at FundCalibre. One option is the Liontrust UK Micro Cap fund which invests in Britain’s smallest businesses, following in the footsteps of the successful Liontrust UK Smaller Companies fund.

Get our latest insights in the UK Smaller Companies market in our recent market update: