Core-satellite models can only be effective with purpose: Vanguard

A new report demonstrates financial advisers continue to favour the core-satellite investment methodology, but without structural and disciplined approaches, it can lead to a raft of unintended risks.

The Vanguard Adviser Portfolio Trends Report 2026 gathered insights from more than 100 advisers in 2025 and found the industry continues to favour disciplined core-satellite construction, with average indexed exposure around 50% and the normal range of indexation being around 20%-65%.

Active and indexed exposures stood at 49% and 44%, respectively, with total portfolio costs mostly contained between 0.30% and 0.75%.

However, across the portfolios analysed, Vanguard said there is a "long tail" of practices that apply the model liberally without clear purpose, which leads to overlapping exposures, style drift, excessive costs and unintended risks.

Vanguard Australia head of financial adviser services Rachel White said the issue revolves around how deliberately advisers are utilising the approach.

"What we see in the data is encouraging at a surface level, advisers are getting most of the big decisions right," White said.

"But when we look deeper, there are some quiet portfolio construction behaviours that have become normal over time, and those behaviours carry consequences for diversification, risk and long-term returns.

"The issue is not that advisers are using satellites, it is how deliberately they are being used."

She said the most successful implementations were those where advisers made deliberate decisions on the clear distinction between core and satellite, while calculating the risk they were willing to absorb.

A strong core and strategic asset allocation remains the primary determinant of long-term outcomes. Satellites should enhance, not obscure, portfolio intent, she added.

Meanwhile, although cost continues to be a key consideration in portfolio construction, alternative assets were the most expensive component, with average costs of 1.46% per year, exceeding the current average range.

Vanguard found many commonly used alternative strategies delivered inconsistent outcomes, with some private market funds underperforming basic equity benchmarks despite the higher fee load.

However, allocations towards alternatives remained relatively low for retail clients, as advisers were reminded to reconsider if the asset class should remain in a portfolio.

Among different asset classes, cash remains elevated, averaging 21% of the fixed income allocation but higher and longer-term cash allocations could cost clients the term premium and the defensive benefits of duration, Vanguard said.

Across both Australian and global equities, advisers adopted a more balanced, style-neutral posture than in previous years.

"Cash is a useful liquidity tool, but it is not a long-term return driver and in regard to alternatives their inclusion does not automatically mean better outcomes, in many cases they raise costs and complexity without clearly improving long-term results," White said.

"Markets change, but the drivers of long-term outcomes do not. Asset allocation, diversification and costs still do the heavy lifting.

"For advisers in 2026, getting the basics right remains the most powerful decision they can make which then allows advisers have clear conversations, which builds confidence and clarity with clients."