Efficient way to build a core-satellite portfolio by using exchange-traded funds
par Vincent LLOVIO
Université Toulouse Capitole 1 - TSE - Master 1 in Economics 2016
The core/satellite strategy appeared in the financial world after that the portfolio construction, provided by the modern portfolio theory showed some issue and tended to underperform against a particular benchmark. Most financial agents argue that investors can extract several benefits from this portfolio construction.
My goal was to find the best way to take an advantage from the core/satellite by using ETFs. Effectively, I think that this financial vehicle has to take part in a core/satellite because of this features which can overcome the few issues of this portfolio strategy like the lack of transparency and liquidity in the satellite.
Secondly, when an investor has this kind of portfolio, he has to accurately define his financial objectives to choose the right allocation between the core and the satellite, and by consequent he could optimize the return/risk pair.
Thirdly, an investor has to be aware of his tax situation. In fact, an investor expect to get the higher after-tax return. A tax management in his portfolio can increase the performance of this one.
This strategy has a major limit. It is not reachable to everyone to implement this approach. The core/satellite construction can be used only by high-net-worth investor. But even that, nowadays this strategy is considered as one of the main driver of portfolio construction. This dissertation allows me to discover the ETF and the core/satellite strategy.
In this first work, I have been pretty general in my analysis to get a first approach of this environment. In a future work, I would like to focus on the dynamic way to manage a core/satellite portfolio and particularly the model about the DCS approach provided by the EDHEC risk institute
-- 1. Summary of the use of different instruments in the core/satellite allocation
-- Scott Welch, "The Hitchhiker's Guide to Core/Satellite Investing", The journal of wealth management, Winter 2008.
-- Donald J. Mulvihill, "Core and Satellite Portfolio Structure : Investments and Tax Considerations",The journal of wealth management, Summer 2005.
-- Clifford H. Quisenberry, "Core/Satellite Strategies for the High-Net-Worth Investor", CFA institute, December 2006.
-- Donald J. Mulvihill, "Core and Satellite : Implementation Issues", The journal of wealth management, Spring 2006.
-- N. Amenc, F. Ducoulombier, F. Goltz, V. Le Sourd, A. Lodh, and E. Shirbini, "The EDHEC European ETF Survey 2014", EDHEC-Risk institute, March 2015.
-- N. Amenc, P. Malaise, L. Martellini, "Revisiting Core-Satellite Investing - A dynamic Model of Relative Risk Management", EDHEC-Risk institute, November 2012.
-- Clifford H. Quisenberry, "Optimal allocation of a Taxable Core and Satellite Portfolio Structure", The journal of wealth management, Summer 2003.
-- N. Amenc, F. Goltz, and A. Grigoriu, "Risk Control Through Dynamic Core-Satellite Portfolios of ETFs : Applications to Absolute Return Funds and Tactical Asset Allocation", The Journal of Alternative Investments, Fall 2010.