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Using Active Fundamental Equity Strategies in Core-Satellite Portfolio Construction

State Street Global Advisors’ active fundamental strategies are well suited for use as high-conviction satellite equity allocations, i.e., fulfilling the need for complementary alpha to add diversification and boost return potential beyond benchmark performance.


Senior Strategist / Investment Strategy & Research
Senior Research Analyst
Portfolio Strategist, Fundamental Equities
Portfolio Strategist

For institutional equity portfolios, a core-satellite construction approach is often preferred due to its flexibility and fee efficiency. At the “core” is a significant allocation to index and/or enhanced1 equities, as they both offer diversified market access and ample liquidity at a lower fee. This core is then strengthened with the addition of high-conviction “satellite” portfolios. Core-satellite construction allows investors to control tracking error by adjusting the weight of the satellite portfolio relative to the core beta exposure.

For the research highlighted in this paper we created three illustrative examples of blended portfolios that use a core-satellite approach, utilizing State Street’s Global Equity Select strategy and constrained by a realized 3-year TE budget of around 1% with respect to the benchmark. We were able to validate our hypothesis that investment solutions which incorporate both active and indexed strategies typically create more efficient equity portfolios and help to achieve a more optimal risk-return mix. The three illustrative portfolios generated higher information ratios, along with similar tracking error, and also resulted in improved market capture in up as well as down markets. (Download the article below for detailed performance results.)

State Street’s high-conviction active equity strategies are a reliable component of institutional investor equity portfolio allocations, including those that have defined risk and return requirements. Our fundamental equity teams have the skills, rigor, and discipline required to uncover opportunities that others overlook.


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