Efficient portfolio construction involves creating a diversified portfolio that attempts to maximize return potential for a given level of risk. One way to add value is through a core and satellite approach. 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 (View Chart), such as emerging markets, real estate securities and high yield bonds.
Using this approach, investors can:
- Separate and manage various sources of portfolio risk to improve portfolio structure and efficiency;
- Add return generating opportunities and / or volatility-reducing asset classes to a portfolio;
- increase the likelihood of meeting their specific financial goals.
Core strategies provide efficient exposure to asset classes that are broadly representative of the market (much of this market representation comes in the form of equity and interest rate risk). While implementation strategies vary, we believe that a combination of active, structured or passive strategies provide a solid core for most investors.
Satellite strategies generally deliver higher levels of active alpha (returns derived from skilled active management) or exotic beta (exposure to risk factors with low correlation to global markets) and can enhance expected returns. Examples include REITS, Commodities, High Yield Bonds and Emerging Markets.