Core and satellite is a way of arranging a portfolio. The core is broad and diversified. A satellite is a smaller holding chosen for a specific reason, such as a theme, a sector or a set of values.
inaam is built to be a satellite. The fund holds 23 listed companies across five impact themes, and its own target market determination says it is designed for people investing no more than 10% of their capital.
Two things get said about inaam often enough that they deserve a straight answer. One is that 23 companies is not many. The other is that an app with a low minimum is somewhere you start and then leave. Both are really questions about where a fund like this belongs among everything else a person owns.
what core and satellite means
Vanguard Australia describes a core and satellite approach as one that “starts with low-cost, diversified investments at the core, and gives you the flexibility to personalise around the edges”. It adds that the approach can suit investors who want to add specific strategies or sectors alongside their core holdings.
In plain words, the core is the part that looks like the whole market. Moneysmart notes that the way your super fund invests is probably a good example of diversification, so for many people super is already doing some of that job. A satellite is a smaller holding you choose on purpose. The term belongs to the investment industry and has no legal definition, so treat it as a way of thinking and read each product on its own terms.
what diversification does
ASIC’s Moneysmart defines diversification as spreading your money across a number of different investments to reduce the overall volatility of your portfolio. The risks it lists as ones a spread can soften include:
- A single company collapsing. If you own shares only in that business, you could lose most or all of your money.
- Whole industries staying flat or losing value for years.
- A single country’s share market falling.
- A downturn in share markets generally. Holding other asset classes, such as bonds or cash, can reduce how far the total falls.
Moneysmart gives four common ways to spread money: across asset classes, within an asset class, across countries, and through funds that hold many investments for you. It also notes that you can diversify across investment managers, by using more than one, to reduce your reliance on a single manager’s decisions.
what a concentrated fund is
A concentrated fund holds a small number of investments on purpose. Moneysmart’s example of the opposite is an ETF tracking the S&P/ASX 200, which gives you Australia’s largest 200 companies through one investment. The two are built for different jobs.
| a broad index fund | a concentrated fund | |
|---|---|---|
| how many holdings | Hundreds, sometimes thousands. | A short list. Each one is there for a stated reason. |
| what decides what is in it | An index rule, usually company size. | A manager’s method, which should be written down where you can read it. |
| what one bad company does | Little. Each holding is a small share of the total. | More. Each holding is a larger share of the total. |
| what you can know about each holding | The list is published, and it is long. | Enough to read every company and the reason it is held. |
Neither design is the better one in general. A broad fund spreads risk and tells you little about any single holding. A concentrated fund lets you see exactly what you own, and it leaves you more exposed to each company and each theme.
what the inaam fund holds
The inaam fund holds 23 listed companies today, across five impact themes that members customise. The PDS sets out how it is put together: seven classes, each an impact category intended to hold at least three listed companies, with a member’s money allocated across five of the seven. The fund invests in mid to large companies listed on major exchanges, and every company it holds is named in the app.
The PDS also names concentration among the fund’s risks. Its list of key risk areas includes portfolio concentrations by industry, asset class and exchange location. A fund built around five themes will move with those themes, and it will not always move with the wider market.
what is in the fund
read the list
The ten highest scoring companies are on how it works, the five themes are on investment areas, and the working behind the impact figures is on the impact hub.
what the fund’s own documents say about size
The clearest statement of how the fund is meant to be used comes from its issuer. The target market determination, issued by the fund’s responsible entity, says the fund has been designed for consumers who, among other things:
- are investing no more than 10% of their capital, not including the value of their home;
- do not need liquidity or access to their capital, and can wait between three and seven years;
- can tolerate a higher level of risk, and do not require capital preservation.
It also says the fund is not suitable for investors requiring regular income, capital preservation or ready access to capital. That is the issuer describing who the fund was designed for, and it tells you how the fund is meant to be used: as one part of a wider set of investments. It is general information, so it does not say what is right for you.
is it something you outgrow?
A low minimum makes an app easy to start with, and the fund’s is $100. Whether you outgrow it depends on what you expected it to be. If it was meant to be everything you own, the documents above say it was never designed for that. If it is one part, three things change as your money grows:
- The subscription shrinks as a share. It is $10 a month whatever your balance, so it is a large share of a small balance and a small share of a large one. The fee calculator shows it at your balance.
- The same share is more dollars. A tenth of a larger total is a larger amount, so the part can grow as the whole does.
- The rest gets built around it. As savings grow, there is more to spread across asset classes, and Moneysmart suggests talking to a financial adviser if you need help building a diversified portfolio.
keeping the mix in check
Moneysmart points out that a mix drifts. The value of each investment changes in its own way, so what starts as a balanced set can end up tilted toward whatever grew most. Rebalancing means adjusting back to the mix that suits your goals and your appetite for risk. It names two common ways: putting new money into the investments you want more of, or selling some and moving the money, which may create a tax bill.
For a satellite, that means checking now and then what share of your total it has become, against the share you meant it to be.
what to take away
Core and satellite is a plain idea: most of your money broad, a smaller part specific. A concentrated impact fund belongs in the second group, and the inaam fund’s own documents say so.
If you hold it that way, 23 companies you can read by name is a feature of the design. If it were all you held, it would be a risk. The PDS and the target market determination are the places to check which of those describes you.
