Date
12 December 2017
The 'core-satellite' investment strategy refers to creating a portfolio by maintaining a strong foundation (core) of more traditional investments, around which more specialised (satellite) investments can be added. Photo: BlackRock
The 'core-satellite' investment strategy refers to creating a portfolio by maintaining a strong foundation (core) of more traditional investments, around which more specialised (satellite) investments can be added. Photo: BlackRock

Digital technology: Transforming approach to thematic investing

Technology and its widespread application are transforming all aspects of our lives, with some describing digitalization as the third industrial revolution in human history. We believe that the application of digital technology has the potential to affect our personal lives and influence the way we invest.

Technology is creating new opportunities

Digitalization has disrupted many industries, with the biggest impact seen in the financial services sector, as companies fight to stay ahead. Institutions have to continuously improve and optimize their cybersecurity, electronic payment process and financial technology. This brings huge opportunities for companies engaged in related businesses, and at the same time creates an opportunity for investors to invest in digital themed ETFs.

In the modern concept of asset allocation, the “core-satellite” investment strategy is often mentioned. In simple terms, this refers to creating a diversified and dynamic portfolio by maintaining a strong foundation (core) of more traditional investments, around which more specialised (satellite) investments can be added. The returns of these satellite investments are expected to outperform the market.

ETFs that target broad exposures, allowing allocation to global or regional markets, can be ideal choices for the core of portfolios. However, given the specialised nature of thematic investing, allocating to the themes in which you have the most conviction as a satellite to a core portfolio could be an option. New technology allows the creation of thematic ETFs, which can aid satellite investment allocation.

Low-cost tool to gain exposure

When deciding on satellite investments, investors could look to select their own stocks. However, ETFs focused on digitalization and other megatrend investment themes allow investors to focus on attractive opportunities while also offering the advantage of investment diversification and low cost, thus helping the investor save time, effort and expense in the process. Moreover, as ETFs aim to track the performance of specific indices, investors can monitor the ETF portfolio performance on a daily basis. They have a high level of transparency.

In comparison to non-listed mutual funds, ETF transactions are more convenient and flexible, with higher liquidity. Investors can adjust their ETF allocation at any time within the trading hours, in response to market changes. This is a key advantage in an investment environment where changes can occur in a moment.

Generally, a “core-satellite” investment strategy will place at least half of the capital in the core investment. Investors hoping to capture the opportunity presented by the megatrend themes can consider investing part of the capital that they would have originally allocated to a core investment to an ETF focused on digitalization or a megatrend investment theme, and use them as allocation for satellite investments.

Technology and consumer behavior appear to be rapidly disrupting many industries. Digitization may provide a theme for investors, too.

– Contact us at [email protected]

RT/RA

Head of iShares and Index Investing Asia Pacific

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