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Understanding The Core-Satellite Approach To Portfolio Construction

TedTed
in Fund Discussions
FYI: The general principle behind the core-satellite approach is that a portfolio gets split into two parts.

One segment of the portfolio is committed to the core strategy of investing in cheap, diversified index funds. This is the portion of the portfolio that generally shouldn’t be traded, and should be regularly added to via investing in a workplace retirement plan, IRA or some other systematic investing program.

The other segment is the satellite strategy, where investors can overweight in specific sectors, regions or styles in an attempt to take advantage of current economic and market conditions to produce outsized returns. This is the actively managed part of the overall portfolio. The advantage of this strategy is that the majority of the portfolio is focused on long-term wealth creation, but still allows for tilting the portfolio to try to outperform the market without taking on too much risk.
Regards,
Ted
http://mutualfunds.com/education/understanding-core-satellite-approach-portfolio-construction/

Comments

  • JoJo26
    "In some ways, it’s similar to the smart beta approach gaining popularity in the ETF world."

    Who writes this crap? In no way is this similar to smart beta, other than you can use the word "tilt." Smart beta tilts, however, are long-term in nature and by no means tactical.
  • hank
    edited February 2018
    Sorta sounds like what I’ve gravitated to over the years. Except I don’t use index funds. Core = a diversified balanced portfolio (about a dozen funds) that rarely gets traded. Pretty much a sleep-well mix. Flexible portion = cash / cash-like holdings plus riskier investments. The Flex part I can vary at will.

    As I’ve aged, I’ve slowly increased the Core portion from around 50% two decades ago to 75% today. By the time I’m too old to remember who I am, I hope to have moved to 100% Core. Than I’ll keep my hands off everything and just let it ride.

    Not a recommendation for others. Not going to beat the market either. A good sleep well approach that keeps ya from mucking things up too badly.
  • MikeMMikeM
    Good article. Maybe I think that because this approach is what I do. 1/2 my tax deffered retirement money is in a stable index investing robo-portfolio and the other 1/2 I self manage.

    Definition I found for smart beta:
    Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes based on measures such as volatility or dividends.
    are long-term in nature and by no means tactical.
    This appears to be your opinion. I don't see any definitions using this caveat in my short check of Google.

    And the author says:
    A core-satellite approach is a great way to focus on long-term capital growth, while still allowing for the opportunity to juice returns through active portfolio management.
    I don't know, seems like a similar approach to me.
  • JoJo26
    If you invest in smart beta you are doing so because you believe in the long-term benefits of certain factors (small cap, value, dividends, vol, etc.). You are not making any tilts based on a shorter-term tactical move (sector overweights, etc). #polaropposites
  • JoJo26
    If anything, your smart beta investments would be a part of the "core" portfolio.
  • TedTed
    @JoJo26: I hate to tell you this, but your nitpicking !
    Regards,
    Ted:)
  • JoJo26
    Not nitpicking at all. There is a HUGE difference between long-term tilts to access risk premia and short-term tilts to take advantage of market dislocations.
  • MikeMMikeM
    edited February 2018
    I see your distinction @JoJo26, but I don't see the article missing the point or that he is full of crap. The author does make the comment,
    ...take advantage of current economic and market conditions to produce outsized returns.
    . I guess that could be interpreted as being short term tilt, but on the other hand it could also mean conditions are for small caps to do better going forward, or value is preferred over growth in this part of the economic cycle. Those kind of trends can last many years through an economic cycle. I guess it's what you read into his words.

    I think the bigger point of the article was to have part of your portfolio in a buy and hold diversified format that has shown to grow over time, but also use economic and investing knowledge to over weight investments that fit the economy more efficiently to add alpha (or is it beta, I get it confused). The risk of course is your beta move could be wrong and essentially hinder your returns.

    Anyway. I see your point but agree with Ted.
  • JoJo26
    Thanks for making my point... Tale advantage of "current" conditions means you're making a decision that is not longer-term, smart betaish
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