The Endowus core-satellite investment strategy

Many investors are interested in the growth potential of a specific market or sector, and seek a convenient way to invest directly in their favoured region, sector or theme, effortlessly with expert advice at low cost.

The Endowus Satellite Portfolios allow investors to do just this, while engaging only the specific funds and fund managers that have passed a stringent screening process.

Investors can supplement their existing core portfolio allocation, which should take up the bulk of their investment portfolio, or take a concentrated position in a way that reflects their personal investment views while capitalising on key opportunities as they arise through the Satellite Portfolios.

Where do we start?

The first step towards constructing suitable personal investment holdings is always about understanding "you". For each of your financial goals, it is critical to assess the priority, timeline, expected return, risk tolerance, source of funds (Cash, CPF or SRS), amount you will invest, investment preferences, and more.

Start with a core allocation

A core asset allocation should always anchor any investor’s asset allocation and investment portfolio. Our Core advised portfolios are used to provide long-term, stable market returns by exposing oneself to the long-term market returns of financial assets such as equities and fixed income, and compounding that return over time to build long-term wealth.

The Endowus Core Portfolios have several key characteristics that are essential to qualify as a core allocation:

1. Passively indexed to broad markets: When we say broad markets, we mean not just the broad Singapore market or even the broad China or US market, but globally diversified broad markets for each asset class.
2. Passive in asset allocation: It should not be taking active bets in countries, sectors, asset classes at a whim. Whether these changes are driven by an algorithm or by a real person does not matter, as behind each algorithm are certain assumptions and data used to make decisions inputted by a human being reflecting their investment philosophy or beliefs. As a result, these quant-based algorithms are no different in the way they perform from a human managing the portfolio in an active or tactical manner. The probability of these strategies ultimately failing to even achieve passive market returns is high based on empirical evidence.
3. A low-cost solution that gives the highest chance of success to the investment strategy: High cost is the single biggest barrier to good outcomes. A lower cost immediately enhances returns without any change in the risk profile of the portfolio. This is why Endowus either provides you with access to institutional funds that are lower cost and higher quality, or 100% rebates to you all trailer fees or any commission we receive, unlike other banks or fund platforms.

Read more on The Business Times: Core-satellite investing: a prudent approach for the long term

Why the Endowus Core Portfolios?

The Endowus Core Portfolios have all of the key characteristics of being a broadly and globally diversified portfolio with a strategic passive asset allocation (SPAA).

We build a multi-asset portfolio where investors can target their risk profile through asset allocation between long-term growth equities and diversified fixed income assets. We maintain a strategic, long-term, and top-down passive asset allocation which is optimised further by automated rebalancing to the target asset allocation.

Endowus does not believe in tactically or actively changing your allocations based on market conditions or economic indicators, and will not change your target asset allocation without your explicit consent.

Within these Core Portfolios, the primary option is the Flagship Portfolios, through which you can access globally diversified portfolios built with best-in-class funds, and is investable with Cash, SRS, and also uniquely for Endowus clients — your CPF OA savings. On the Endowus digital wealth platform, Singapore investors can manage all three sources of their money.

We implement our portfolios by accessing leading global fund managers with the expertise, scale and real, proven track records in implementing their strategies successfully over time. We access their best-in-class funds at the lowest cost possible, so you grow your money like professional investors around the world. These funds, some of which are exclusively available at Endowus, are carefully selected bottom-up to best represent your goal's top-down SPAA.

The other option within the Core Portfolios is similar but more geared towards sustainable ESG (environment, social, governance) investing. The ESG Portfolios are built using select funds from the world’s top ESG fund managers, and are investable with Cash and SRS savings. The ESG Portfolios are top-down passive in asset allocation, globally diversified, and low cost just like the Flagship Portfolios, but actively allocated to the ESG factors.

Both the Flagship Portfolios and ESG Portfolios are multi-asset, multi-manager portfolios that allow you to optimise your asset allocation based on your own risk tolerance, a process that the Endowus platform makes quick and easy.

These portfolios are carefully built and maintained by the Endowus Investment Office, and suitable for new and experienced investors alike. They are low cost, optimised to enhance risk-return, and suited to building long-term wealth through steady compounding of market returns. The Core Portfolios should always form the backbone of any investors’ overall investment strategy.

For many clients, while the Satellite Portfolios may look enticing, they may not need to look beyond the Core Portfolios for building long-term wealth and reaching their investment goals, often allocating all their wealth to the Flagship Portfolios, ESG Portfolios, or both.

What is a satellite allocation?

Satellite strategies have several characteristics that make them different from core portfolios.

1. They tend to be more concentrated in nature and narrow in exposure, targeting a certain sector or country or theme, as compared to the passive broad market exposure of core portfolios.
2. While they may follow an index and can be passive, most satellite portfolios and funds tend to be active in the way they invest and seek to generate alpha (above market returns).
3. The investments tend to be tactical or opportunistic investment strategies, as opposed to the strategic nature of core investments.
4. The investments tend to be shorter term in nature and may not be held for a long time. Satellite portfolios are used to supplement the core portfolios and are an active decision by the investor to provide further diversification opportunities to try to generate alpha, or to express a specific investment view or strategy. This can be done through a single fund or a portfolio of funds.

Satellite portfolios for institutional investors, such as sovereign wealth funds or university endowments, are often used to potentially enhance risk-adjusted returns or achieve further diversification. Sometimes quantitative assessments are used, such as Sharpe Ratios or measures to enhance downside or upside capture. Other times, qualitative enhancements could be made such as adding non-correlated positions, adding asymmetric or idiosyncratic risk to the portfolio, or adjusting the duration of the investment horizon.

Most common satellite portfolios could include narrower investment mandates such as regional (e.g. emerging markets or Europe), single country (e.g. China or US), single sector funds (e.g. technology, healthcare or real estate), exposure to certain factors (e.g. value or growth or smart beta) or themes (e.g. megatrends, artificial intelligence, or water). Diversifying beyond public markets to private markets or other asset classes is also a common satellite strategy.

Get more flexibility and choice with Endowus Satellite Portfolios

Endowus has a suite of six Satellite Portfolios (as of July 2023) for investors in Singapore. Based on our survey, these were the six most requested by our clients. They are:

• Technology
• Real Assets
• Megatrends
• China Equities
• China Fixed Income
• Low Volatility Fixed Income

These Satellite Portfolios are carefully curated, constructed, and actively monitored by the Endowus Investment Office to make the portfolio customisation process easier for our clients. We focus on optimising the risk-adjusted returns, diversifying across investment styles and managers, and lowering costs at the individual fund and portfolio level.

Clients with a high conviction in certain markets or sectors (such as China, real estate, or infrastructure) can simply invest in an Endowus Satellite Portfolio to complement their Core Portfolios, without having to select from thousands of individual funds.

You might want to invest in a Satellite Portfolio if you:

• Have a strong belief in the growth story of a specific market, sector, or theme
• Want to incorporate some tactical or active elements to complement your Core portfolios, which have a more strategic or passive investment approach
• Aim to get higher expected returns by increasing exposure in specific investment themes that supplement the Core portfolios, which aim to track market returns

You might want to stick to just the Core Portfolios only if you:

• Want a risk-optimised, globally and sectorally diversified investment approach that allows your returns to compound over the long term
• Prefer a fuss-free, tried-and-tested passive approach to investing that is simple to understand, easy to use, and does not require constant decision-making, active monitoring, and tracking of the latest trends

Why do many investors end up with satellite-satellite instead of core-satellite?

Some investors customise their own portfolios through direct exposure to certain funds, such as unit trusts or exchange traded funds (ETFs), or single stocks and bonds. However, in doing so they often chase after the latest fad or popular sectors, countries or funds with good short-term performance.

Through banks, brokers or financial advisors, we are often “pushed” products — such as ETFs (many of which are active and narrow active funds these days), unit trusts or insurance-linked products — which are often high-cost and come with misaligned kickbacks and sales charges, leading to investments that are unsuitable for one’s goals or risk appetite.

It is interesting to note that many digital wealth platforms including several robo-advisors are actually advising a satellite portfolio as their core strategy, with active asset allocations or heavy overweights in certain countries or sectors. In addition, they often compound initial satellite portfolios with even more satellite portfolios, thereby creating a satellite-satellite strategy instead of a core-satellite strategy.

The advisor you choose is important and will determine your ultimate strategy, and therefore your success as an investor.

Endowus’ mission to help people invest better to make their lives easier today and better prepared for the future. We want to make expert investing and building long-term wealth easier for everyone. We do the hard work of creating professional advised portfolios at low and fair cost, by making access to institutional funds and portfolios available to all.

Both the Core and Satellite Portfolios are curated by the Endowus Investment Office with best-in-class funds as building blocks chosen from thousands of funds available globally, often bringing new funds into Singapore that were previously not available especially to retail investors. Learn about our strict, institutional-grade screening process here.

These are the best-in-class funds and portfolios most suitable for Singapore-based investors, in Singapore dollars (SGD) or hedged to Singapore dollars when appropriate. They are designed, constructed and optimised to provide solutions for investors that are truly diversified and low-cost.

What's the right way to use Endowus Satellite Portfolios?

As mentioned above, we must always start from the point of view that everybody is different, with different risk appetites and different goals for their investments.

Many investors may not even require satellite portfolios, as the Flagship and ESG portfolios provide enough diversification to achieve long-term growth of wealth.

For those that want to use satellite portfolios, it should supplement their existing exposure to core portfolios, or if you are a beginner investor, you can always commit to a core-satellite allocation that is right for you. For some it may be a 10% allocation to satellite and for others with a higher risk appetite and enough wealth to cover their core goals, it could be higher than 50%. Core should always remain the stable cornerstone of your investment holdings.

Needless to say, it is important to look at one’s overall holdings holistically to make sure that you are comfortable about how the new Satellite Portfolios change the asset allocation of the overall holdings. It is easy to lose sight of the overall total picture or how these various goals and portfolios are working together towards your common financial goals.

However, the Endowus platform was created to provide you with a bird’s eye view of your overall portfolio and also allow you to view your wealth by goal or funding source.

Find out more about our Satellite portfolio offerings here. Create your own satellite portfolio using Endowus Fund Smart, a powerful, low-cost platform that offers over 150 best-in-class funds, where you can save 50% or more on your annual investment costs. For further details about Fund Smart, refer to this article.

Next on the Endowus Fin.Lit Academy

Read the next article in the curriculum: Which robo-advisor suits you best?

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