Caitriona Wortley (Drummond Capital Partners) and Cameron Gleeson (Betashares) discuss the use of core and satellite exposures within a managed accounts portfolio.

Perhaps the most fundamental element of any investment strategy is how the portfolio is constructed. A popular approach used by advisers is core-satellite investing.

Essentially, the core-satellite approach is a portfolio management strategy that combines a stable, low-cost ‘core’ of passive investments (like index funds or ETFs) — which are bought and held for the long-term — with a smaller, more actively managed or higher-risk ‘satellite’ portion.

These satellites (such as specific regional or sector exposures) tend to be more tactical ‘client specific’ positions. The combination of both core and satellite aim to provide the portfolio with both diversification and potential outperformance.

According to Caitriona Wortley — Head of Strategic Growth at Drummond Capital Partners - the starting preference for the majority of advisers and advice practices when managing money is the core-satellite approach.

Drummond is an advocate of the ‘best ideas’ approach to building portfolios, which hinges on finding possible blends of solutions for a portfolio — like passive, active or private markets — to achieve the outcome an investor is looking for and in a way that makes it a compelling investment proposition.

“We run ‘best ideas’ portfolios across various market segments as the core part of the portfolio. However, we do spend a lot of time working with practices on satellites in relation to a particular segment, like private markets, that sits alongside the core,” says Caitriona.

She believes segmentation can be powerful when constructing portfolios. “Rather than building a bespoke portfolio across all your clients, you should think more about segmentation and blending solutions that can be tailored to create specific outcomes for clients.”

Joining Caitriona in a panel discussion on ‘Making core and satellite work’ at the 2025 IMAP Portfolio Management Conference in Sydney, Cameron Gleeson — Senior Investment Strategist at Betashares — says Betashares believes in using a low cost, well-diversified approach as the building block for client portfolios.

However, he acknowledges there is considerable interest by advisers in using a barbell strategy (an investment concept that suggests the best way to strike a balance between risk and reward is to invest in the two extremes of high-risk and no-risk assets, while avoiding middle-of-the-road choices) when constructing portfolios.

Cameron explains: “If you’ve got capital to invest, you might think the best way to produce outperformance is, for example, going to be through private markets. So, using a barbell approach of anchoring in those broad diversified exposures, which are efficiently run and provide good tax outcomes, together with investing your capital where you think it’s going to have the greatest impact, can be a really powerful approach to investing.

“That’s one way of thinking about core and satellite. Invest your money where you think you can add value, and then be really ruthless and efficient with the core.”

When using a core-satellite approach, Cameron says it’s critical for advisers to carefully consider the impact that satellites can have on the core, including the risk that satellite exposures can have on the overall portfolio.

“At Betashares, we believe that the important characteristics of the core are low turnover and holding assets over the long-term, because the impact of tax can really eat into your after-tax returns,” he says.

Cameron believes it’s essential advisers properly educate their clients on the tax implications of investing, as well as talking to them about their satellite positions (which could be legacy positions) and whether they’re still appropriate. “Clients also need to know how they can fund the tax consequences of selling down a particular stock.”

When considering satellites (which might range from direct equities through to retirement solutions) as part of the overall core-satellite approach, Drummond undertakes considerable work with modelling — at a practice, client, and segment specific level. The business is always looking for the best combination of solutions, including satellites, for a particular segment or client preference in the best way possible.

“At Drummond, we use a tool that is stochastic modelling based. We can look at a client’s situation from a ‘probability of outcomes’ perspective,” says Caitriona. “Most of our modelling is done with private markets, which supports advisers with the implementation of private markets as an advice solution for clients. Advisers are able to use our modelling tool to look at the outcomes of blending private markets (as a satellite) with the core portfolio.”

Drummond’s approach to modelling also helps it to tease out and test market opportunities that help form its views on ‘best ideas’ for its portfolio.

It’s an approach that Cameron supports, citing Bitcoin as an example. He refers to a client who recently wanted to add some exposure of Bitcoin alongside their traditional core. Betashares did modelling around what a 0.5 per cent, 1 per cent, 2 per cent and 5 per cent allocation of Bitcoin would do to the client’s portfolio overall.

“When you’re looking at that sort of modelling, it’s important to not just look at the potential returns based on historical performance and market volatility, but to also look at the risk of catastrophic loss from a drawdown,” he says.

“When looking at satellites, it’s very important to think about the risks and the size of the allocation — and the implications that can have on returns — and not just focus on the overall performance of the satellite. Advisers need to find the sweet spot that clients are comfortable with in their satellites.”

Looking back three or five years ago, Cameron says most of the allocations to satellites were typically either a legacy position or an allocation to a structural growth theme. For example, back then, there was a lot of interest in growth equities, like cybersecurity, in satellites.

However, today, Cameron is increasingly seeing the use of satellites for investments other than just growth, like income or accessing private markets.

“Yields are currently down in Australian equities, so if an investor is happy with their core portfolio but needs to boost their overall income, they can use a satellite exposure with fixed income, private markets or equities to get that income,” he says.

Cameron believes investors are increasingly thinking more dynamically about their portfolios, which may include adding some private markets exposure. And even though that exposure may be liquid now, they understand the risk of it being illiquid in the future. “So, using a satellite exposure for private equity or private credit, which sites outside the core, is something we’re progressively seeing in client portfolios,” he says.

Caitriona also sees a growing appetite by investors for private markets. Responding to this trend, Drummond launched an actively managed, semi-liquid private markets SMA last year, and while this offering is currently only available for wholesale investors, Caitriona expects it will be opened up shortly to retail investors.

“You can get broad exposure from private markets that can really enhance a client’s overall outcome,” she says. “Increasingly, we’re also seeing very specific use cases. So, we’ll soon be launching a retail private credit monthly income product. This means for retiree clients, rather than just building income in the liquid core portfolio, we’re focusing on solutions that can be blended together — both core and satellite — to deliver the required outcome for the client, whether that’s extra income or growth.”

Caitriona believes the managed accounts structure is the optimal way to deliver these blended core-satellite solutions, because the structure provides transparency, liquidity that is more preferable than a fund-of-funds, and there is less fee layering. “So, from a client perspective, managed accounts are compelling and that’s why Drummond has gone down this path.”