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.
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.
1“Enhanced” strategies seek to outperform their cap-weighted benchmarks but take relatively low active risk – risk that is similar to that of the median index manager. Enhanced strategies’ tracking error is designed to offer the opportunity to outperform the index, and enhanced managers use active positions in stocks, sectors, and countries to “tilt” a portfolio to maximize alpha exposure while expending an active risk budget in an informed way. This approach offers a level of active market participation in an IR- and fee-efficient manner.
This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy's Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The views expressed are the views of Hélène Veltman, Kamal Gupta, Alison Gardner, and Thomas Kronzer through March 1, 2022, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
Some of the Portfolio Characteristics shown in Figures 1, 3, 4, 6, 8, 9, and 10 are based on the characteristics of the underlying market indices. Neither index characteristics nor sample portfolio characteristics is intended to represent the characteristics of any particular mutual fund, exchange-traded fund, or product offered by SSGA. Actual characteristics may differ substantially from the characteristics presented. Past performance is not a guarantee of future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses; an investor cannot invest in an index.
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The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
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Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.