The Hitchhiker’s Guide to Core/Satellite Investing

Abstract

Although the concept of core/satellite investing is not new, most of the literature on the subject is written by academics or practitioners for other academics or practitioners. This article attempts to present the arguments for a core/satellite investing approach in a practical, nontechnical manner, the way it might be explained to a potential investor or a new client. While the use of some technical terminology is unavoidable, the intent here is to distill—that is, hitchhike on—the quantitative and academic work that has been done on this subject and present it in an intuitive and easy-to-understand way. The focus will be on 1) why it makes sense to include a healthy allocation to passive and/or tax-enhanced index strategies, 2) why a diversified portfolio should include alternative investments, and 3) how to build an intelligent core/satellite portfolio and why it makes sense.

TOPICS: Portfolio theory, real assets/alternative investments/private equity, mutual funds/passive investing/indexing, performance measurement