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Deeper dive

Fly me to the moon?

What’s the first thing that comes to mind when you hear these five words? For many of us, it’s a catchy song immortalized by Frank Sinatra. Few of us would associate the moon (or Earth) with investments.

Yet this concept could help investors meet their long-term financial goals, in the form of a “core-satellite” investment approach. How does this work?

Like Earth’s gravity, investors can’t escape the pull of financial commitments. Each of us can list financial “must haves.” A “core” portfolio is designed to deliver the investment returns necessary to achieve them. To generate returns, investors need to accept risk. Once they have identified their own risk-return appetite, the best way for them to maximize their chances of achieving their goals, in our view, is to invest in a well-diversified portfolio, across asset classes and markets worldwide.

But it’s not uncommon for even hard-core investors to stare up at the moon, Earth’s own satellite, and dream. A “satellite” portfolio can link their grander aspirations with a tangible investment solution. Investors may want to mix financial and altruistic goals by devoting capital to sustainable, longer-term themes. Perhaps they prefer to complement a long-term portfolio with short-term opportunistic trading ideas. Others may employ a satellite portfolio to start a legacy portfolio of less-liquid private markets instruments, sacrificing ease of sale now for potentially higher returns relative to listed securities.

Before following the Sultan of Swoon’s lead and flying to the moon with a core-satellite investment plan, investors should consider three points:

  • Straightforward needs and goals may not warrant a satellite portfolio. It is possible long-run objectives can be suitably met with a single, core investment solution.
  • Never lose sight of total wealth; review all portfolios together before and while undertaking this approach. And take into account wealth that isn’t in financial instruments too – this may include a business, property, and even your human capital.
  • Taking too much security-specific risk in the satellite portfolio could compromise the core’s well-diversified, disciplined investment approach. Regular reviews of objectives against total wealth might help here, as could periodic rebalancing of capital between core and satellite strategies.

Ol’ Blue Eyes will still probably be the first thing that springs to mind when you next hear Fly Me to the Moon. But perhaps the familiar strains will impel a few more of us to think of our investments too.

Mark Haefele

Global Chief Investment Officer
Wealth Management

Matthew Carter

Global Investment Office

Bottom line

A “core-satellite” approach could help certain investors reach their goals when putting capital to work. A well-diversified, disciplined strategy for the core portfolio could be used to target "must have" financial commitments. Aspirational objectives might be met using

satellite investments in alternative assets, strategies or themes. Regardless of the approach, it is important to analyze total wealth and regularly review objectives against investment outcomes.

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