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Article

Core Versus Satellite: How Much Should a Taxable Investor Allocate to the Core Equity Portfolio?

Paul Bouchey and Mahesh Pritamani
The Journal of Wealth Management Spring 2017, 19 (4) 35-43; DOI: https://doi.org/10.3905/jwm.2017.19.4.035
Paul Bouchey
is the chief investment officer at Parametric in Seattle, WA
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Mahesh Pritamani
is a senior researcher at Parametric in Seattle, WA
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Abstract

This article examines the question facing taxable investors: How much of the equity portfolio should be invested in a tax-managed core portfolio versus active satellite managers? Historical simulations, which vary the level of active management skill, demonstrate the trade-offs between excess returns, turnover, and taxes. The authors’ results suggest that even in the presence of skilled active managers, the allocation to the core portfolio should exceed 50% for most investors. For taxable investors with moderate levels of aversion to risk, they find that the optimal allocation to the core portfolio should typically be greater than 50%, even if one expects satellite managers to deliver pretax excess returns of up to 4%. If investors are highly risk averse or expect lower levels of alpha from the satellite managers, then the optimal allocation is higher.

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The Journal of Wealth Management: 19 (4)
The Journal of Wealth Management
Vol. 19, Issue 4
Spring 2017
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Core Versus Satellite: How Much Should a Taxable Investor Allocate to the Core Equity Portfolio?
Paul Bouchey, Mahesh Pritamani
The Journal of Wealth Management Jan 2017, 19 (4) 35-43; DOI: 10.3905/jwm.2017.19.4.035

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Core Versus Satellite: How Much Should a Taxable Investor Allocate to the Core Equity Portfolio?
Paul Bouchey, Mahesh Pritamani
The Journal of Wealth Management Jan 2017, 19 (4) 35-43; DOI: 10.3905/jwm.2017.19.4.035
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  • Article
    • Abstract
    • SIMULATING THE CORE–SATELLITE STRUCTURE
    • SIMULATING THE SATELLITE MANAGERS
    • TAX-MANAGED CORE RESULTS
    • SATELLITE RESULTS
    • CORE–SATELLITE RESULTS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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