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Core & Satellite Investment Management

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Written By
Dan Buckley
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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Updated
Jan 15, 2024

Core & Satellite Investment Management is a portfolio approach blending passive and active investment styles.

This method diversifies risk while aiming for higher returns than traditional passive management.

 

Key Takeaways – Core & Satellite Investment Management

  • Core & satellite investment management balances stability and growth:
    • a “core” of low-risk, long-term investments complemented by “satellites” of higher-risk, tactical opportunities.
  • This strategy diversifies risk while allowing for targeted growth through strategic asset allocation in the core and tactical asset allocation in the satellites.
  • Combines passive index funds (core) with actively managed investments (satellites).

 

The Core Component

The core portion, typically a large part of the portfolio, is invested in passive, low-cost index funds or ETFs.

These investments mirror market indices, such as the S&P 500, providing broad market exposure.

The core is designed for stability and long-term growth.

This minimizes trading costs and taxes.

 

The Satellite Component

Satellite holdings, smaller portions of the portfolio, involve active management strategies.

These might include individual stocks, sector-specific ETFs, or alternative investments.

The satellites aim to outperform the market.

This is based on short-term tactical trading opportunities or specific investment themes.

 

Strategic Allocation

A common allocation might be 70-80% in the core and 20-30% in satellites.

An example might be an investor putting:

  • 70-80% of their money in standard portfolios largely indexed to the market and
  • 20-30% in specialized investments that they know about and can add value to (e.g., rental properties, online businesses)

Nonetheless, this varies based on individual risk tolerance and investment goals.

 

Risk Management

This strategy balances risk.

The core provides a stable foundation, reducing the overall portfolio’s volatility.

The satellites, while riskier, offer the potential for higher returns and could be process-driven based on the individual’s skills.

 

Cost Efficiency

By emphasizing index funds in the core, the strategy reduces costs compared to fully active management.

Satellites tend to be more expensive due to more active trading, but are limited in size, which keeps overall expenses lower.

 

Performance Potential

The core & satellite approach can potentially outperform purely active or passive strategies.

The core ensures market participation, while satellites provide opportunities to capitalize on specific market trends or sectors.

 

Flexibility

This strategy offers flexibility.

Investors can adjust satellite positions to adapt to changing market conditions or personal circumstances.

The stable core remains largely untouched.

 

Tax Efficiency

Investing primarily in index funds in the core minimizes turnover, which leads to lower capital gains taxes.

Active satellite investments can be managed to optimize tax implications.

 

Suitability

Core & satellite investment is suitable for a range of investors – anywhere from conservative to moderately aggressive.

The approach can be tailored to individual investment horizons and risk profiles.

 

Conclusion

Core & satellite investment management offers a balanced approach, combining the benefits of passive and active management.

It provides a foundation for stable growth with the potential for enhanced returns through tactical satellite investments.

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