By John Wasik
CHICAGO Nov 16 The "core and satellite"
strategy for portfolio management is an elegant and simple
approach that will not only help you diversify but allow you to
reduce your country and political risk.
Your core consists of broad indexes of stocks and bonds with
exchange-traded funds like the Vanguard Total World Stock Index
ETF and the Schwab U.S. Aggregate Bond ETF.
Then you can have some fun by working on satellite holdings
that include emerging markets, specialized themes and dividend
payers. These are more specialized investments that focus on
long-term global growth and help distance you from increasing
volatility and the slow-growth economies of the U.S. and Europe.
Although you can set your allocation any way you'd like to
accommodate your long-term goals and risk tolerance, a
boilerplate mix would be about 60 percent core holdings and 40
percent satellites. This would follow an investment policy
statement that you put in place and review once a year.
As a general rule, your core-and-satellite approach should
reflect where you are in life. There is no one right approach,
but those near or in retirement might want to have their
satellites focus on increasing yield with vehicles like master
limited partnerships or non-U.S. bonds while reducing exposure
to the U.S. bond market. Younger investors might want to focus
on specific promising sectors like technology or infrastructure
while sampling small-cap international companies.
The number of sectors in your satellites depends upon your
specific written goals and what you need. Do you have emerging
markets represented in your portfolio? Is most of your stock
allocation concentrated in one country or one style of investing
such as mega-cap growth (think S&P 500)? Fill in the gaps with
Here are some investments to consider for your satellites:
1. Emerging market growth for those overconcentrated in
Since all economies are linked in some way, the economic
pain of the U.S. and Europe is felt around the world. The global
economy will grow at a 3.3 percent rate in 2013, according to
the International Monetary Fund.
Real (after inflation) growth in Latin America, however, is
expected to reach 4 percent, with resource-rich Brazil the main
engine in that region.
Good vehicles to capture this growth include the EGShares
Brazil Infrastructure Index fund and the PowerShares
FTSE RAFI Pacific ex-Japan Portfolio. The latter fund
excludes Japan, which will continue to struggle.
But there are even brighter spots: Sub-Saharan Africa is set
for 5.7 percent growth next year, India for 6 percent and China
for 8.2 percent, the IMF says.
2. International utilities
Given population growth, infrastructure building in
developing countries is likely to continue - expect expanded
utility grids, roads, water works and all of the trappings of
Two funds that specialize in this development are the SPDR
S&P International Utilities Sector ETF and the iShares
S&P Global Infrastructure fund, which also includes U.S.
companies that pay steady dividends.
3. Individual countries
Turkey has been growing at more than 8 percent, which puts
it in a league with China. It has a relatively young population
and it poised for global trade.
You can sample the country's stocks through the iShares MSCI
Turkey Investable Market Index ETF, which is up nearly
50 percent year to date through Nov. 14.
Another lesser-known growth magnet is Thailand, represented
by the iShares MSCI Thailand Investable Market Index, up
more than 26 percent through Oct. 30.
A third pillar of my least-heralded growth candidates is
Mexico. The iShares MSCI Mexico Investable Market Index
offers a sampling of global stocks such as CEMEX, the cement
company, and Grupo Modelo, the beer producer. The ETF is up
about 23 percent through Oct. 31.
As optimistic as I am about these countries, I also build a
lot of uncertainty risk into my model. Europe is still hobbled
by its debt and austerity crisis and the U.S. is trying to
resolve its debt ceiling and fiscal cliff threat. These problems
still may spill over into emerging markets. A renewed global
banking crisis or U.S. retrenchment could darken the picture
even more, so keep in mind that your satellites should not be
dominant portfolio positions and long-term holds.