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The Core/Satellite approach

Discussion in 'Investing Strategies' started by Property WA, 5th Oct, 2007.

  1. Property WA

    Property WA Active Member

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    Hi all,

    Haven't posted for a while and with the sun streaming in just before beer o'clock on Friday (4pm in WA) I thought I'd say a quick G'day.

    For those who are familiar with the above...what are your thoughts?

    I just registered for an upcoming portfolio construction half day event that will examine the method but so far I like what I've read.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Perhaps for those of us who aren't familiar with it - you could give us a brief summary ?
     
  3. Property WA

    Property WA Active Member

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    Sure Sim,

    Though there appears to be several variations, here's the idea...

    Core-Satellite investing is an approach which combines a portfolio of indexed funds alongside a satellite component of actively managed funds, which can provide above benchmark returns.

    In essence, you build up a core exposure to an asset class to capture market return and then add to this with satellite additions to provide the 'alpha' on top. If, for eg, you were investing in Australian Shares you may place 70% into a plain-jane index fund to match the index (or use an ETF) and then say ok, well that will capture the market, lets aim to beet it using a couple of long/short managers, high conviction boutique players or indeed a selection of direct shares.

    In stems from the fact - alot of active managers fail to beat the benchmark. For example, over the five years to 30 June 2005, only 31 per cent of retail Australian equities funds consistently outperformed the benchmark and only eight per cent demonstrated skill* (this is Morningstar research)

    It's mainly used in the managed fund spectrum, but I think satellite additions could well be direct shares or units in an unlisted trust.


    Looking forward to learning more and would love to hear the forums opions


    *Skill is judged by both the level of excess returns over an appropriate benchmark and the consistency with which this has been achieved every month
     
  4. bundy1964

    bundy1964 Well-Known Member

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    Absolute Return Funds that are currently listed have one outperforming the current years index as at June 30. HAP as the leading return fund has tanked this quarter and there seems little life in the others to make great turnarounds currently. A flat or down market for a while may improve their returns????
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'm kind of moving toward a strategy not unlike what you described - some core basic Australian share funds (although I'm not currently considering index funds - mostly because I haven't researched them yet), with some peripheral boutique sector/geographic specific funds for the "alpha". I'm still learning and looking to get the mix right.

    Although I have a basic understanding of what the financial planning industry thinks about portfolio construction, I haven't really ever paid much attention to it, because I don't trust them.
     
  6. bundy1964

    bundy1964 Well-Known Member

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    I still like trying to beat the fund managers......

    I am stuck though when it comes to foreign markets of either direct invest with little chance of having useful information unless it's only US/UK markets and getting no leverage or leveraging using managed funds and putting some faith in them getting it right.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think using some moderate leverage and a bit of trust over a controlled portion of your portfolio is a suitable strategy for foreign market exposure.

    Comes down to your expectations and goals I guess - if you are looking for a get-in-get-out-quick type arrangement, then you'd need a lot more information and a lot more control either way, right?
     
  8. bundy1964

    bundy1964 Well-Known Member

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    I tend to think that managed funds arn't too good for get-in-get-out-quick trades especialy when you are dealing with them on margins. Hard to not want a piece of the action in asia at the moment, just how long the ride will last is anyones guess.

    Even information from local funds can be lacking eg: Tyndall's yearly report made no mention of what they had invested in.
     
  9. AsxBroker

    AsxBroker Well-Known Member

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    Hi guys,

    Core and Satellite isn't necessarily a pure index fund, we use Barclays as a Core, they are a style neutral manager (vs growth or value) who use an index overlay so they go a little bit over and a little bit under depending on their view on the company and invest in alot of managed funds, eg, Barclays International invests in over 1,000 companies, hence giving a wonderful spread.

    For Satellites, Concentrated funds like Macquarie Morgan Stanley Global Franchise or Perpetual Australian Concentrated are high conviction managers who invest in fewer funds, to maximise gains, if it goes pear shaped obviously the fund is more likely to take harder hits.

    Also Satellites can be any sort of theme which is more concentrated than the core fund which has a good spread over everything, themes can include geographic, industry (eg, technology, mining), growth vs value, distribution funds, ethical investing, infrastructure, etc. I think the only thing that wouldn't be a theme is gearing a fund.

    Bundy's example of Tyndall is a Value conviction fund manager, he can look here to find there top 10 holdings (PDF) for the Tyndall Australian Share Value funds actual investments.

    Cheers,

    Dan

    PS This is general information and not advice to invest. Speak to your FPA registered Financial Planner, Accountant or Tax Adviser.
     
    Last edited by a moderator: 7th Oct, 2007
  10. Glebe

    Glebe Well-Known Member

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    ishares.com.au by Barclays has some great products for potential international ''core''. Add in Hunter Hall and/or Platinum as your satellites.

    For domestic core, perhaps use Streettracks then use any one of hundreds of the domestic managed funds out there.
     
  11. Property WA

    Property WA Active Member

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    Some great info there fellas, cheers.

    My line of thinking is much the same ASXbroker, my explanatory post was running long but yeah, I definately agree with the 'theme' targeting as a possible satellite addition.

    Stuff like the BRICS, global property, 'water', agricultural (food based) options and emerging resources interest me and I think there's some really good options to add alpha - with the benefit of a core foundation to maintain traditional returns/exposure.

    Looking forward to this upcoming Core/Satellite event in Perth.
     
  12. bundy1964

    bundy1964 Well-Known Member

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    Thanks Dan
    I do hold 80% of their top 10 and it may get closer to 100% soon. Thats the sort of thing that makes me need to look offshore and into the small cap local market using a fund.