APC Core + Satellite Investment Approach

For many years, APC has recommended a suite of low cost portfolios based upon academic research, which are designed to provide efficient access to investment markets together with the capacity to outperform over time.

These portfolios invest in the traditional asset classes: cash, fixed interest, equities and listed property, and into various sub-asset classes such as emerging markets. These are the Classic portfolios and range from the most defensive, Classic 30, to the most growth oriented, Classic 100.

To re-iterate the key tenants of this investment philosophy;

  • risk and return are related
  • diversification is essential
  • markets work (that is to say, they are efficient when it comes to interpreting information and translating this in prices)
  • structure explains performance

These portfolios and the underlying investment principles they employ, have served our clients well over many years and will continue to do so for many years to come.

Challenging macro-economic times

Since the Global Financial Crisis (GFC -2008/09) or what the Americans call ‘The Great Recession’ investment markets have had to navigate an increasingly complex set of circumstances.  These are largely (but not exclusively) driven by the enhanced role of central banks around the world in attempting to ‘smooth’ asset class returns (direct property and listed shares primarily) and thereby support consumer and business confidence and the broader economy.

As a result we now find as part of our ‘new world order’, concepts such as ‘negative interest rates’ and ‘MMT or Modern Monetary Theory’ (the printing of money) have become a reality rather than a theory.  This can create added challenges for portfolio construction and management.

These are challenges that APC has responded to, via our Investment Committee process and our investment methodology has evolved as a result.

So, how has APC enhanced this investment methodology, based upon the foundation of the core investment philosophy?

Introducing the Core + Satellite Investment Approach

The objective of a ‘core and satellite’ approach is to harness the return provided by the broad market through a low cost ‘core’, and to include where appropriate, opportunities to diversify and achieve certain portfolio objectives or outcomes through selective sources. Examples of these individual portfolio objectives may be to reduce market related volatility, to enhance passive income or increase return opportunity (and risk profile).

The Classic Portfolio Suite

At the Core of this approach is one of the Classic portfolios.

From conservative through to high growth, this suite of portfolios provides a sound investment foundation.  APC reduces risk by applying significant levels of diversification at the asset class, sub-sector asset class and direct security level.  They are low cost and aim to limit unnecessary trading costs.  The Classic Portfolios are market linked which means they are not immune from market volatility risk and would be highly ‘correlated’ with broad market movement, both up and down.

Their aim is to moderately outperform the market after fees in the long run and for many the Classic portfolio will remain completely appropriate to their needs.

Satellite investments

With one of the Classic portfolios at its core, APC may now consider the addition of other investments.  These investments are viewed in bands which have varying liquidity characteristics (this relates to the ability to cash out an investment if needed) and portfolio objectives;

  • Band One: Targeted Strategies

Investments of this type may provide the opportunity to target or ‘tilt’ specific market segments in much the same way as we have tilted our portfolios to small companies and ‘value’ companies for nearly 20 years.  These may include specific asset classes like Global Healthcare or sustainability focussed strategies and SRI (Socially Responsible Investing). These tend to be fully liquid, listed investments.

  • Band Two: Low Correlation Strategies

Band two investments may be those with different correlation profiles to the traditional asset classes.. Correlation explains the extent that one investment’s performance behaves when compared to another investment’s performance over the same time period. The addition of a less or uncorrelated investment into a portfolio can improve diversification and lower volatility.  Examples may include private or unlisted company funds, or income strategies, which have less reliance on the listed bond market.  Investments in this band may be priced monthly and have monthly accessibility windows.

  • Band Three: Opportunistic Strategies

At the outer band of potential ‘satellite; investment exposure would include investments which are opportunistic in nature.  By this. we mean either they have been able to be purchased at a below market rate or they are performing well however require further capital and expertise to accelerate growth. These types of investments include – for example – exposure to niche unlisted companies (via a professionally managed fund structure).

Investments of this type are typically priced monthly or quarterly and have no liquidity.  This can mean the investment must be held for a fixed term before investment capital becomes accessible.

Next Step

APCs investment committee regularly considers and reviews high quality investments, which may be considered for inclusion in the above bands, with this an evolutionary and ongoing process.

It is important to note that reducing diversification or access to capital through alternative or ‘satellite’ investments can increase portfolio risk and will not be appropriate for all investors.  As such, it is important to fully understand an investment’s characteristics before a decision is made to include it in your portfolio.  APC would consider various factors with you – including your individual needs and objectives – should it be an appropriate consideration for you.

If you wish to discuss this in relation to your own portfolio please feel free to make contact with any member of the APC Advice team.