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STA Weekly Report – How a Core-Satellite Approach to Portfolio Management Works

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How a Core-Satellite Approach to Portfolio Management Works
Weekly Snapshot of Global Asset Class Performance
Protecting Your Loved Ones with Life Insurance
401k Plan Manager

How a Core-Satellite Approach to Portfolio Management Works

As we have discussed previously, there are several ways to approach portfolio construction. One approach is to have a fully active portfolio that seeks to outperform an underlying benchmark.

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This approach tends to be accompanied by higher costs and low levels of tax efficiency. Another popular approach is to be fully indexed to a broad benchmark. While this approach will keep returns generally in line with a benchmark, portfolio performance will typically underperform due to fees and virtually no opportunity to outperform. Then there is what is termed the Core Satellite approach which brings together bits and pieces of both the fully active and fully indexed approach.

The Core Satellite approach is displayed in the image below. As you can see, the core typically represents a low-cost mix of funds and ETF’s that are intended to closely track a given benchmark’s performance.  This more passive allocation is typically constructed to deliver market returns in a low-cost manner with an eye toward tax efficiency achieved view generally low turnover. The core is then flanked by a combination of satellite strategies that offer an opportunity to outperform the market. These strategies typically will make up a smaller part of the overall portfolio, but because they can be more concentrated can still deliver outperformance. By constructing a portfolio in this manner, an investor can express long-term views in the core while the satellites allow for expressing more short-term views that might generate incremental alpha, while at the same time not endangering long-term financial goals. 


A couple of weeks ago in this newsletter, we highlighted capital market assumptions and how they play a role in portfolio construction. If you recall, we touched on how they help investment managers determine their strategic asset allocation. For our readers that may not be familiar with the term strategic asset allocation, one might think of it as a longer-term view of how portfolios should be constructed. More specifically it is a determination of how much should be invested in broad categories like stocks and bonds, or at a more granular level between specific exposures. The strategic asset allocation ultimately serve as the target weights that a portfolio is periodically rebalanced to. This is really what is represented in the Core within the Core-Satellite Approach.

The table that follows shows some hypothetical allocations using a strategic allocation approach. As you might notice, the allocation between each asset class category is driven by risk tolerance. For more aggressive investors this may translate into a strategic asset allocation that is more heavily weighted toward stocks while for more conservative investors it may lead to a strategic asset allocation that is more heavily weighted toward bonds.

To determine the specific weightings, modern portfolio theory is used to put portfolios along what is called the efficient frontier, where returns are maximized for a given level of risk or where risk is minimized for a given level of return. The efficient frontier represents a set of optimal portfolios. As the next figure shows, there is a region under the curve that is attainable but the most optimal portfolios would be found along the curve that represents the efficient frontier.

Getting this part of the equation goes a long way toward helping an investor achieve their longer-term goals. The other part entails having access to a wide array of strategies that can be complementary to the Core’s strategic allocation and provide an investor with either the ability to generate incremental alpha or mitigate risk.

If you have any questions, please feel free to email me at


STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Andrei Costas, Portfolio Manager
Nan Lu, Senior Portfolio Manager
Robin Chan, Senior Trader

Protecting Your Loved Ones with Life Insurance
By Scott A. Bishop, MBA, CPA/PFS, CFP

How much life insurance do you need?
Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows your need for life insurance increases.
Here are some questions that can help you start thinking about the amount of life insurance you need.

Click here to read full article

Important Disclosure:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.


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