Core-satellite providing is a method of portfolio construction designed to minimize costs, tax liability and volatility while stipulating an opportunity to outperform the broad stock market as a whole. The core of the portfolio consists of bovine investments that track major market indices, such as the Sample and Poor’s 500 Index (S&P 500). Additional positions, known as moons, are added to the portfolio in the form of actively managed investments.
Here is how core-satellite supplying works:
Portfolio Construction
First, look at the core portion of your portfolio. The assets make be allocated to investments that are designed to be managed passively. For example, you could put half of the assets addressed to stocks into an index fund that tracks the S&P 500.
For the actively controlled portion, the goal is to select investments where a portfolio manager’s artistry provides an opportunity to earn greater returns than those produced by the passive portion of the portfolio.
In this example, you could put 10% of the portfolio into a high-yield hold together fund and divide the remaining stock portion evenly between a biotechnology repository and a commodities fund. The asset allocation might break down as be being presented in Figure 1 below.
| Investment | Percentage |
| S&P 500 Index Fund | 50% |
| Actively Controlled High-Yield Bond Fund | 10% |
| Actively Managed Biotechnology Fund | 20% |
| Actively Be in charge ofed Commodities Fund | 20% |
Keep in mind that this portfolio is plainly an example. The core portion of the portfolio can be used to track any index, registering those that intentionally reflect a style bias for value down growth, growth over value, government bonds over corporate reins, domestic markets over foreign markets or whatever you prefer. Similarly, the sky is the limit in the assistant portion.
The Essence of the Strategy
Regardless of the specific investments chosen to fulfill the asset allocation — charge, portfolio volatility and investment returns are the underlying considerations.
A brief survey of each area provides additional insight:
Costs
The core part of the portfolio helps to minimize costs, because passive investments are on the verge of always less expensive than their active counterparts. Since compliant investments track indices, the portfolio changes only when the guide changes. Due to the fact that indices change infrequently, transaction payments and capital gains tax are minimized. Active portfolio management, on the other participation, is based on trading. Each trade generates execution costs and possibility tax liabilities in the form of capital gains.
Volatility
Beta is a measure of range market volatility. Volatility is something many investors prefer to refrain from. By dedicating a large portion of a portfolio to passive investments, the beta of the amount to portfolio should not come in high. Adding investments, such as a commodities stock, which are not correlated to the movements of the stock market as a whole, helps limit comprehensive volatility when the markets are in flux.
Returns
Active managers request to outperform their benchmarks. By allocating a minority of the portfolio to active guidance, the opportunity is in place for an active manager to outperform the benchmark, thus adding to the restitution yield generated by the overall portfolio and resulting in benchmark-beating returns for the portfolio as a healthy.
How to Implement the Strategy
A core-satellite portfolio can be implemented in a myriad of ways. A requited fund-based portfolio, as shown in Figure 1, is just one potential implementation. This master plan can also be implemented using various combinations of separately managed accounts, the Board traded funds (ETFs), mutual funds, stocks, bonds and any other union of core index-tracking investments coupled with alpha-seeking investments.
The Duff Line
The core-satellite approach provides an opportunity to access the best of all planets. Better-than-average performance, limited volatility and cost control all come together in a extensile package that can be designed specifically to cater to your needs.