Once a core holding is in place, the natural next question for many investors using a core-and-satellite approach is what to put in the satellite portion. It is easy to choose satellites based on whatever has performed well recently or received the most media attention, but that approach tends to produce a portfolio built on hindsight rather than genuine diversification or conviction. Choosing satellite positions well means being clear about what gap each one is meant to fill, and being honest about whether it fills that gap or merely duplicates exposure the core already provides.
What a satellite position is actually for
A satellite holding should do one of a small number of things: add exposure to a region, sector or theme genuinely under-represented in the core; express a specific, reasoned view about where returns might come from; or provide a form of diversification the core structurally lacks, such as a different asset class. If a satellite cannot clearly do one of these things, it is worth asking whether it belongs in the portfolio at all.
The three broad categories
- Regional tilts — extra exposure to a country or region, such as emerging markets, Japan or Europe.
- Sector tilts — extra exposure to an industry, such as healthcare, financials or technology.
- Thematic tilts — exposure to a trend that cuts across sectors and regions, such as clean energy, automation or an ageing population.
Regional tilts
Many global index funds are weighted by company market capitalisation, which means the largest markets — historically dominated by the United States — receive the largest allocation. An investor who believes this weighting under-represents faster-growing regions, or who simply wants more balance, might use a regional satellite to adjust that tilt.
This is closely related to, but distinct from, the concept of home bias discussed elsewhere, which describes UK investors over-allocating to their own domestic market. A regional satellite tilt is usually the opposite adjustment — deliberately adding exposure away from wherever a global index happens to be most heavily concentrated, whether that is the UK or, as is more often the case with a global index, the United States.
Considerations
- Emerging markets funds carry higher currency and political risk than developed market funds, and can be more volatile.
- Regional funds focused on a single country, such as a China or India fund, concentrate risk far more than a broader regional fund covering several emerging economies.
- Check the core fund's existing regional breakdown before adding a tilt — the "gap" an investor perceives may already be smaller than assumed.
Sector tilts
Sector funds allow an investor to add or reduce exposure to a specific part of the economy — for example, healthcare, financials, energy or technology. These can make sense where an investor has a long-term structural view, such as an ageing global population supporting demand for healthcare, or a view about long-term technological adoption.
It is worth remembering that a broad global core fund is not sector-neutral to begin with — it already reflects whatever sector weightings the underlying index happens to have at any given time, which can shift considerably over the years as different industries grow or shrink in relative market value. Before adding a sector satellite, checking the core's existing sector breakdown helps clarify whether the intended tilt is adding genuinely new exposure, or simply reinforcing a sector the core is already heavily weighted towards.
Risks specific to sector funds
Sector funds are inherently less diversified than broad funds, since they concentrate in one part of the economy. They can also be more cyclical — some sectors move in and out of favour markedly over the economic cycle, meaning a sector satellite bought after a period of strong performance may already be expensively valued relative to its own history.
Thematic tilts
Thematic funds invest according to a trend rather than a traditional sector or region classification — for instance, renewable energy, robotics, or the transition to electric transport. They can be appealing because they connect an investment to a story an investor finds compelling and easy to follow in the news.
Things to check before adding a thematic fund
- How the fund actually defines and screens for the theme, since two funds with similar names can hold very different companies.
- Whether the fund is concentrated in a small number of holdings, which is common with thematic funds and increases single-company risk.
- The ongoing charges figure, which tends to be higher for specialist thematic funds than for broad trackers.
- Whether the theme has already been priced in by markets — a widely discussed theme is not automatically an unexploited opportunity.
A framework for evaluating any satellite candidate
| Question | Why it matters |
|---|---|
| What gap does this fill that the core does not? | Avoids duplicating exposure already held. |
| How concentrated is the fund? | Fewer, larger holdings mean higher single-company or single-sector risk. |
| What is the ongoing charges figure? | Satellite funds are often pricier; the cost needs to be justified by the role played. |
| How volatile has the fund been historically? | More specialist funds tend to be more volatile than the diversified core. |
| What size should this position be? | Position size should reflect both conviction and the fund's concentration risk. |
Position sizing for satellites
Even a well-chosen satellite can do damage to a portfolio if it is sized too large. A common approach is to size individual satellite positions so that even a severe fall in that single fund — say, a 50% decline — would only have a modest effect on the total portfolio. For example, a position representing 5% of a total portfolio falling by half reduces the whole portfolio by only 2.5%, which is a very different outcome from a 25% position falling by the same amount.
A worked example
Suppose a hypothetical investor holds a £50,000 portfolio with an 80% core allocation (£40,000) in a global tracker fund, and wants to allocate the remaining £10,000 across satellites. They decide their global tracker is already heavily weighted to large US technology companies, so instead of adding another technology fund, they choose a £4,000 position in a global smaller companies fund (a genuine gap, since trackers under-represent smaller firms), a £3,000 position in an emerging markets fund (adding regional exposure the core weights lightly), and a £3,000 position in a healthcare sector fund, reflecting a long-term thematic view. Each satellite fills a distinct, statable gap, and no single position exceeds 8% of the total portfolio.
A fourth category: asset class satellites
Beyond regional, sector and thematic tilts, some satellites add an entirely different asset class the core does not cover at all, rather than tilting within equities. This might include a dedicated bond fund for an otherwise all-equity core, a small allocation to gold or diversified commodities, or a property fund. These are discussed in more depth elsewhere, but they are worth including in the same evaluation framework as any other satellite candidate, since the same core question applies — what gap does this fill, and is the position sized appropriately for its risk?
Reviewing satellites over time
A satellite chosen for a good reason today will not necessarily remain a good idea indefinitely. Markets move, valuations change, and the original rationale behind a position can become outdated even while the fund itself continues to exist unchanged on a platform's fund list. Building in a periodic review — for example, alongside an annual portfolio rebalance — of whether each satellite's original rationale still holds is a useful discipline distinct from simply checking performance. A satellite that has performed poorly is not automatically wrong to keep, if the underlying rationale is unchanged and the position is appropriately sized; equally, a satellite that has performed well is not automatically right to keep, if the original reasoning behind it no longer applies.
Questions worth revisiting periodically
- Is the gap this satellite was meant to fill still a gap, or has the core's own composition changed in a way that now covers it?
- Has anything about the region, sector or theme changed materially since the position was first chosen?
- Has the position grown, through strong performance, to a size larger than originally intended, requiring trimming back through rebalancing?
- Is the fund's ongoing charge still competitive relative to similar alternatives that may have since become available?
Common mistakes to avoid
- Chasing recent performance — buying whichever sector or theme has done well in the last year or two.
- Choosing satellites that substantially overlap with the core's largest holdings.
- Letting the number of satellites grow without limit, turning the satellite portion into an unstructured second portfolio.
- Ignoring costs, since satellite funds often carry meaningfully higher charges than the core.
- Choosing a satellite purely because a specific figure or publication has discussed it favourably, rather than because it fills a genuine, personally identified gap.
- Failing to account for a satellite's true underlying holdings, which can differ meaningfully from what its name or marketing material might suggest.
A final word on patience versus activity
It can be tempting to treat the satellite portion of a portfolio as somewhere to be constantly active, swapping positions in and out as new ideas emerge. In practice, satellites chosen carefully and held with the same patience applied to the core tend to give their underlying rationale time to actually play out, which frequent switching does not allow.
Key takeaways
- A satellite position should fill a specific, identifiable gap in the core — regional, sector, thematic, or a different asset class entirely.
- Regional and sector tilts concentrate risk more than a broad global core, and should be sized accordingly.
- Thematic funds require particular scrutiny of how the theme is defined and how concentrated the resulting holdings are.
- Sizing satellites so a severe single-fund loss only modestly affects the whole portfolio limits the downside of being wrong.
- Avoid choosing satellites simply because they have performed well recently.
- Always check current HMRC and FCA figures and allowances, as these change from tax year to tax year.