Core & Satellite

Core & Satellite Portfolio Management is an investment strategy that incorporates traditional Fixed Income and Equity based securities (i.e. index funds, [[Exchange-traded funds]] (ETFs), passive mutual funds, etc.) known as the "core" portion of the portfolio, with a percentage of selected individual securities in the Fixed Income and Equity based side of the portfolio known as the "satellite" portion.

Core portfolio

The "Core" is made of passively-managed securities [index funds, ETFs, passive mutual funds] and uses a traditional benchmark (i.e. Russell 3000 or the S&P 500 Index) to benchmark/compare for performance. The positions may have a particular style bias (i.e. more small cap stocks over mid/large cap companies, more value positions over growth positions, higher or lower concentration in developed international markets) but is relatively consistent with the MONECO Seven Asset Allocation Management Theme. Because of the holdings passive nature and the belief that this structure is essential to long term planning and growth, these "core" holdings are generally not swapped for another type in this class style and are rarely sold unless the client either needs cash for personal use, the allocation is out of bounds within the constraints of the portfolio's plan, or the clients mix of fixed income/equities ratio is modified based on premeditated or unforeseen client events. This style allows to greater tax management/sensitivity inside the investments, returning fewer short and long term capital gains exposures, thereby benefiting the client's tax return.

It also may use separate account managers over passive managed holdings under this style if the manager's bias is towards tax-management to limit transactions and capital gains. The advantages can be greater tax efficiency with lot based trades, trading a position based on when it was purchased as opposed to the standard of First In First Out (FIFO) accounting method, and the potential for greater returns on account positioning that weighs holdings differently then an ETF or passively managed fund.

Satellite portfolio

The "Satellite" portion, by contrast, comprises holdings that the advisor expects will add alpha, the financial term for returns exceeding systemic. Holdings may include actively managed stocks, mutual funds, and separate account managers with a particular sector, region of positions, or Micro or Mega Cap Company Holdings, or passively managed assets with a particular style that is counter to, or even enhances, the style bias of the core. Short holding periods and tax-inefficient positions may result in short-term capital gains or losses.

If the entire allotment of the satellite portion is not deemed worthy of inclusion, that portion will either be reallocated across "core" positions or in a "satellite holder" -- a position that mirrors some aspect of the core (generally the position most closely resembling the benchmark) that is quickly traded when an opportunity is identified without causing major tax implications (e.g., issues with FIFO based trades).

This satellite allocation may be implemented into 100% equity allocations and/or allocations that blend with fixed-income or non-equity positions. The satellite portfolio may be used occasionally for fixed-income investing (emerging market debt, junk bonds, individual bonds) but generally it is dedicated to: equities and alternative assets such as: hedge funds, REITs, commodities, options, and foreign currencies. Principal protected notes may also be used; these investments are truly hybrid in that they provide a guaranteed return of principal while providing upside participation in a number of equity and alternative-investments asset classes.

Portfolios are more than a bunch of financial assets and the satellite investments must be selected and managed considering the portfolio as a whole. The satellite should improve not only the return but the risk/return profile of the portfolio, and not only quantitatively [the Sharpe ratio or whatever other risk/return measures used] but also qualitatively, by adding sources of value [non-correlated strategies, short and medium-term investment ideas, risk-asymmetric assets, etc.] different from that in the core but still consistent with the market and economic view and the client's financial planning goals.

Theory of this investment style

Historically, greater active management of a portfolio generally results in greater returns and taxable interests. In lower return environments, active management by an individual investor of "core" positions generally underperforms passive management after taxes and expenses in real return performance. The theory/key of the "Core/Satellite" management style is that by design and active management, it limits the taxes and the expenses inside the core holding while the 'potential return lost' from passive management is significantly offset by the strong correlation in return to large equity indexes and the additional returns come from assets with projected future returns in excess of the core benchmarks after taxes, inflation and expenses.