Some institutional investors are betting on highly concentrated equity portfolios to gain more alpha while at the same time expanding allocations to their core passive strategies, according to consultants, managers and pension fund executives.
As global equity markets are showing signs of a lengthy slowdown and investors are more cautious about costs, a new approach to the traditional core-satellite strategy is spreading across the world. The idea is anchored on the premise that investors in active equity strategies that hug a particular benchmark might be paying for alpha but getting mostly “closet” beta, consultants and managers said.
Another contributing factor is the poor performance of enhanced indexing and quantitative risk-control strategies. Once considered as a reliable way of harvesting alpha, many of these strategies — which tend to make a large number of small bets against an index — have nosedived in performance, driving investors to seek different sources of return, consultants said.
According to proponents of the updated core-satellite approach, investors should use a largely passive core portfolio coupled with more concentrated bets to maximize alpha in a cost-efficient way by using one or more concentrated managers.
“It's core-satellite on steroids,” said Francis M. Kinniry Jr., principal in the investment counseling and research division at the Vanguard Group, Malvern, Pa.
As much as 75% of an equity portfolio could be passively managed in such an investment approach. The remainder is actively managed and usually comprises concentrated portfolios containing as few as 15 to 20 stocks.
While the number of funds and assets under management linked to such strategies is unknown, consultants in Europe and the U.S. are seeing evidence the approach is attracting more pension funds, endowments and asset managers.