Core and Satellite
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Move beyond basic diversification with Core and Satellite portfolio construction.
With a Core and Satellite approach, core investments provide a broad foundation comprising U.S. stocks, U.S. fixed income and developed market international equities. The core is then surrounded by satellite investments, such as emerging markets, real estate securities and high yield bonds.
Using this approach, investors can: 1. separate and manage various sources of portfolio risk to improve portfolio structure and efficiency; 2. add return generating opportunities and / or volatility-reducing asset classes to a portfolio; 3. increase the likelihood of meeting their specific financial goals.
Defining Core and Satellite
Core investments provide efficient exposure to asset classes which are broadly representative of the market. Returns are driven by exposure to interest rate (fixed income) and beta (equity risk). Examples include U.S. stocks and bonds, as well as developed market international equities.
Satellite investments potentially deliver higher levels of active alpha (excess returns derived from skilled active management) and exotic beta (exposure to risk factors with low correlations to global markets). Examples include REITs, commodities, high yield bonds and emerging markets.
How Can Satellite Investments Enhance Portfolio Outcomes?
1. Low correlation
Satellites have a tendency to move somewhat independently from traditional U.S. equity and fixed income markets, which typically result in more robust portfolios
2. Similar volatility to the S&P 500
When bundled together, a portfolio of satellites demonstrates a level of risk similar to that of the S&P 500
3. Increased diversification
Satellite investments can potentially increase overall returns while lowering risk
Related Literature
* Diversification does not protect an investor from market risk and does not ensure a profit.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.
Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates.
High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities.
Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.
Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.
An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.
Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Simulated performance is hypothetical and may not take into account material economic and market factors that would impact the adviser’s decision-making. Simulated results are achieved by retroactively applying a model with the benefit of hindsight. The results reflect the reinvestment of dividends and other earnings, but do not reflect fees, transaction costs, and other expenses, which would reduce returns. Actual results will vary. Diversification does not protect an investor from market risk and does not ensure a profit.