The world economy and markets have experienced multiple disruptions over the past six years. From the COVID-19 economic shutdowns in 2020 and the cost-of-living crisis in 2022, to the 7 October 2023 attacks in Israel and this year’s war in Iran, along with the AI boom and the software bust, we have experienced what it means to live in convulsing times.
We have seen pronounced dispersion in performance across different asset classes, geographies and investment styles. Shifting macro conditions and geopolitical shocks have affected different sectors, assets and countries in uneven ways, making it challenging to fully capture opportunities and mitigate risks through index tracking alone.
While the principles of investing with a long-term view and diversifying portfolios remain timeless, some strategies for minimising risk and maximising returns are under challenge. For example Quality investing was traditionally regarded as a sound strategy to navigate downturns, but this approach underperformed in crunches such as the post-pandemic inflationary crisis and has once again underwhelmed since the onset of this year’s war in Iran on 28 February.
Conversely, gold and emerging markets both outperformed US equities in 2025 as investors looked to diversify from US assets. Big tech stocks, meanwhile, have widely outperformed other sectors cumulatively over the past three years. This has raised questions about concentration risk, given their large weighting in the Nasdaq and S&P 500 indices.
In anticipation of continued market distribution in both geopolitics and innovation, Dynasty adopted a core-satellite approach during the third quarter of last year in our house-view global equity portfolio. Our research shows that this philosophy represents a practical way to structure portfolios in an environment in which markets are less synchronised, increasingly complex and have a wider range of possible outcomes. Even AI predictive models fail to call medium-term market directionality with any level of dependability.
Defining the core-satellite approach
From a Dynasty perspective, our strategy splits a portfolio into two parts: a consistent “core” of 75% that is designed to efficiently track a broad benchmark and a set of smaller “satellite” allocations of 25% aimed at enhancing returns or managing specific risks. The role of the satellites is not to replicate the core, but to complement it.
The major component of the core of our house-view global equity portfolio consists of low-cost index funds or Exchange-Traded Funds (ETFs) that provide broad exposure to global equities. This portion anchors the portfolio by delivering market-aligned returns and minimising fees. The core is the engine of market-aligned returns, which statistically have proven challenging for the vast majority of active managers to outperform over the longer term.
Our core aims to replicate the MSCI World Index, which captures large- and mid-cap representation across developed markets. The MSCI World carries around 30% less exposure to US equities than the S&P 500 by diversifying with non-US listed opportunities in other developed markets. Rather than selecting a single MSCI tracker vehicle, we have selected several instruments that, in aggregate, replicate that index, but at a lower cost.
An interesting additional component we have added to our core is enhanced indexation, which sits somewhere between pure passive and active management. By incorporating selected active managers that embed proprietary, quantitative and/or qualitative research to marginally adjust exposures to individual stocks comprising the broader benchmark index, enhanced indexation can quietly add value without dramatically altering the portfolio’s risk profile.
Outperformance at the edges
By contrast, the satellites surrounding the core are smaller, targeted exposures, chosen for diversification, outperformance or risk management in areas the core does not fully address. Their role is to provide diversification and to capture pockets of outperformance.
The core-satellite framework also separates long-term strategic exposure from shorter-term views, reducing the temptation to overhaul entire portfolios in response to market noise. This helps investors stay invested through cycles while still adapting to opportunities and risks as they arise.
Some examples of satellite allocations could include gold, the technology sector, emerging markets or other thematic exposures. Satellites allow us to express a view on more volatile assets without compromising the stability of the overall portfolio. They also allow investors to be hedged against specific exposures, such as inflation or currency risks.
Discipline and flexibility
Between these building blocks, we are able to create portfolios for our investors that strike a balance between discipline and flexibility. The core component reduces tracking error relative to the benchmark at a significantly lower cost versus typical actively managed funds.
The core-satellite approach is particularly appropriate for investors who want the reliability of index exposure without surrendering the ability to pursue opportunities.
At the same time, the satellite components can meaningfully contribute to above-market returns or mitigate specific exposures. Our satellites are under constant scrutiny by our Investment Committee and provide scope for outperformance without betting the entire portfolio on any one conviction.
As a style-agnostic approach, the core-satellite approach mitigates the risk of manager style traps (the major ones being Quality, Momentum, and Value), which can underperform broader indices over extended periods.
(Side note: The tax efficiency of our house-view fund has been maintained, in that all changes made within the fund are not subject to Capital Gains Tax (CGT). However, our core-satellite approach can be replicated outside of the fund for entities where CGT is not applicable. Furthermore, most of our fund building blocks are available as ‘stand-alone’ solutions for clients at lower costs, albeit that the tax advantages as mentioned above are forfeited.)
