Core Satellite Portfolio Construction
The core satellite portfolio construction process is geared towards addressing three main considerations of the investment process: costs, volatility and total returns. Incorporating a strategic blend of core (beta) and satellite (alpha) investment vehicles is an investment strategy we think investors can deploy in order to reduce the ongoing costs of a portfolio, while maximizing the portfolio’s returns on a consistent basis. Traditionally this strategy has been employed with the mindset that certain asset classes are too efficient for active management to work, and some asset classes are still setup for stock picking to thrive. Evidence to support this concept is made evident by the increased struggle for active managers to provide consistent alpha over their respective benchmarks. An advancement on this philosophy doesn’t force an investor to subscribe completely to the Efficient Market Hypothesis (EMH). An alternative to this, is the concept that alpha is not dependent upon the EMH, but the combined factor exposure a given portfolio’s holdings embody along with the skill level of an active manager and their ability to execute on a consistent level.
- Low cost broad index strategies
- Preferably an all country global beta exposure to encompass the opportunity set covered within the model portfolios
- Core exposure aims to maintain some exposure to opportunities passed along by active managers that come in and out of favor of the portfolio managers.
- Several securities may potentially be leading contributors to market indices, but are not held by portfolio managers for reasons they might be confined to due to investment process.
- The incorporation of multi-factor rules based ETF’s could add increased potential for more attractive risk adjusted returns over the course of a market cycle.
- Highly skilled managers
- Reasonably priced active strategies
- Asset classes where broad exposures are not efficiently achieved
- Alternative asset classes (long/short strategies, real assets, private investments)
- High conviction, tactical exposures