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In today's episode, we will introduce you to how to allocate industry-themed funds, and a critical allocation method will be used here: the "core + satellite" method.
1、The "Core + satellite" method
First, let's talk about what the "core + satellite" method is.
The core-satellite strategy is a kind of asset allocation strategy, which first originated in the 1990s and is highly respected by the famous Vanguard Group. It recommends that investors use Vanguard's large-cap index fund as a core asset, closely follow the performance of the index, and then select industry-theme funds as satellite funds to earn excess returns.
Therefore, "core" refers to relatively stable large-cap index funds, and "satellite" refers to industry-theme funds that can earn excess returns.
It needs to be said here that it is best to choose index funds when choosing industry-theme funds because actively managed funds are likely to have style drift. If you only want to buy liquor, actively managed funds may be allocated to other consumer industries such as food and condiments.
2、The advantages of building a "core + satellite" portfolio
What are the advantages of building a "core + satellite" portfolio?
When the market rises, it can follow the rise, avoiding the embarrassment of "only earning the index but not making money", and when the market falls, to a certain extent, the risk of the satellite part investing in the wrong style can be avoided.
Tiger investment research team backtested how the three simulation portfolios performed over the past 5 years, and the data is as follows:
The three portfolios are Broad-based index portfolio, Industry theme portfolio, and "Core + satellite" portfolio.
Thereinto:
Broad-based index portfolio Target: CSI 300 Index (100%)
Industry Theme Portfolio Target: CSI Liquor Index (100%)
"Core + Satellite" Portfolio Target: CSI 300 Index (60%) + CSI Liquor Index (40%)
Data source： Tiger International Investment Research Team
Let's start with the perspective of earnings. Over the past 5 years, in 2019 and 2020, the broad-based index recorded positive returns. In contrast, the annualized return performance of the industry theme portfolio and the "core + satellite" portfolio significantly outperformed the broad-based index portfolio.
Compared with the negative returns of the broad-based index in 2018, 2021, and 2022, the "core+satellite" portfolio still performed better than the broad-based index portfolio.
Data prepared by： Tiger International Investment Research Team
From the point of view of volatility as well as maximum drawdown. In January 2018 to February 2023 range, the annualized volatility and maximum drawdown of the sector thematic portfolio far exceeded the broad-based index portfolio. The "core + satellite" portfolio has moderate volatility and drawdown.
Through the comparison of the above data, we can get the following conclusions:
1.Although the industry theme portfolio has high returns, it will also face higher volatility and the highest drawdown.
2.Although the fluctuation of the broad-based index portfolio is slight, the ability to obtain income is poor.
3.The "core + satellite" portfolio can obtain higher returns on the basis of broad-based indexes, while volatility and maximum drawdown are also relatively moderate.
Therefore, if you want to get good gains while not accepting too high volatility and drawdown, then the "core + satellite" portfolio allocation is a good idea.
Of course, if you prefer trading in exchange, broad-based indices can choose alternatives such as CSI 300 ETFs; SSE 50 ETFs, and Hang Seng Index ETFs. The liquor index can select E Fund (HK) CSI Liquor Index ETF, which is the first liquor ETF outside China!
If you are new to investing and do not yet know how to invest in ETFs, you can click on the course link: Introductory course on ETF investing Gain knowledge about ETF trading immediately!
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