Search icone
Search and publish your papers

The core-satellite model revisited, tracking error control, ETF's and satellites possibilities

Or download with : a doc exchange

About the author


About the document

Published date
documents in English
10 pages
0 times
Validated by
0 Comment
Rate this document
  1. Introduction.
  2. The Core-Satellite model.
    1. Reasons for the Core-Satellite model.
    2. The tracking error.
    3. Other advantages/drawbacks.
    4. The satellites.
  3. Exchange Traded Funds (ETFs).
    1. Overview of Exchange Traded Funds.
    2. Meaning of ETFs.
    3. The kinds of ETFs that exist.
    4. The advantages of ETFs versus open-ended funds.
    5. The ways to use ETFs.
  4. Usefulness of the ETFs in small- and mid-caps or emerging markets and their scope.
    1. The growth of ETFs.
  5. Hedge funds.
    1. Hedge funds in the core.
  6. Conclusion.
  7. References.

A core-satellite management consist in having a core portfolio made up of passive management vehicles (index funds, ETFs, etc.) with low management fees, and separately one, or several, very active satellites that are made up of funds with a strong tracking error, or even funds with no constraint whatsoever on managing relative risk with regard to a benchmark (hedge funds, for example). The purpose of the core component is to control management risks and to improve the efficiency of the overall portfolio by limiting costs. The role of the active components is to provide diversification and to generate out-performance. The core-satellite portfolio model was adopted by institutional investor's years ago. However, the wish to improve the investment efficiency after the adverse market conditions of the early 2000, have helped the move to this strategy during the past years.

[...] The biggest providers: Barclays Global Investors, State Street and Vanguard, by far were well established as big providers of passive investing for mutual funds and pension funds. What kinds of ETFs exist? There are many available ETFs that attempt to track all kind of indexes (such as large-cap, mid-cap, small-cap, etc), specialties (such as value and growth), industries, countries, precious metals and other commodities or commodity indices like GSCI; and more are being developed for the future. Based on EDHEC Risk and Asset Management Research Center's survey by 2004 to European institutional investors and asset managers, the responses reflected the geographical ETFs as a useful tool for both the core and satellite approach. [...]

[...] They can also be used in the satellites to remove the systematic exposure from a long strategy and create a portable alpha component. By identifying the best hedge, the beta exposure is neutralized by taking a short position in an ETF. Core-satellite strategies can be a solution, which generate alpha while preserving benefits of ETFs. While the core delivers the index performance at a moderate expense ratio, the satellites are investments that search for alpha. Diversification and de-correlation can be calibrated as needed to obtain the client's desired risk level. [...]

[...] The example below shows how the global core-satellite portfolio benefit from lower fees and a lower tracking error constraint, with more freedom for the active manager in terms of risk that can be taken. Weight Tracking error Fees Source: Martellini, L., Benchmarks dans la Gestion d'Actifs, Construction de Benchmarks et Risk Profiling?, Novembre 23rd 2003 Therefore the core-satellite management is a cost efficient way to control relative risk (tracking error risk) Other Advantages/Drawbacks Advantages of the ?Satellites? Advantage of the Diversification of the Optimisation of costs managers Bets on talented but young Security for the Brand companies Quick arbitrage according to Control of relative risk the performance Adapted from Martellini, L., Benchmarks dans la Gestion d'Actifs, Construction de Benchmarks et Risk Profiling?, Martellini, L., Novembre 23rd 2003 However, in case of adverse market condition, the risk of a major decline in the portfolio core value (absolute risk) still remains. [...]

Top sold for management

Merger and acquisition - Buffett's bid for Media General's newspapers

 Business & market   |  Management   |  Case study   |  12/21/2017   |   .doc   |   21 pages

Case analysis - Ust Inc. Debt Policy

 Business & market   |  Management   |  Case study   |  01/09/2017   |   .doc   |   10 pages

Recent documents in management category

Events and information management - CRM (Customer Relationship Management)

 Business & market   |  Management   |  Presentation   |  01/18/2019   |   .doc   |   4 pages

Events and information management : MICE (Meetings, Incentive, Conferences, Exhibitions/Events)

 Business & market   |  Management   |  Presentation   |  01/18/2019   |   .doc   |   5 pages