Core and satellite

A core and satellite portfolio combines a conservatively run core portfolio, usually a closet tracker, with smaller, more adventurous investments that aim to outperform. Most of the portfolio is usually invested in the core. A low tracking error is an indication that a fund is closet tracker.

Core and satellite strategies are often adopted by funds. The justification is the reduction of risk: the heavy market weighting reduces beta. A more cynical view would be that it reduces risk for fund managers (that of under-performing badly) while enabling them to still charge higher active management fees on the whole fund.

Investors can follow the strategy themselves. A core can be invested in tracker funds, with the rest in either hedge funds or aggressive alpha funds. Alternatively, enhanced indexing has the advantages of a defined (usually low) level of tracking error and lower fees than a closet tracker.

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