Core & Satellite Investment Strategy

How We Invest Through All Market Cycles

Quick Read

  • We invest based on three components: strategy, research, and fees.

  • The “Core” invests for the long term while the “Satellites” invest in short term opportunities

  • Our research focuses on data driven economic leading indicators

  • We maximize performance with a flat fee investment platform

The Core & Satellite Investment strategy

The holy grail of investing is capturing full stock market returns with no risk. Capturing full stock market returns is easy, however doing so without also exposing your portfolio to losses has been elusive.

To maximize returns while also managing risk, diversification was born. The concept of spreading investments into different asset classes, or sectors, helped manage risk while still participating in market growth. Which sectors or asset classes an investor selected became known as asset allocation.

The Core and Satellite investment strategy is based on this concept of asset allocation. The Core and Satellite investment strategy framework was made famous by David Swensen, who served as Yale’s Chief Investment Officer from 1985 to 2021. His philosophy was rooted in diversifying Yale’s endowment portfolio beyond traditional U.S. stocks and bond asset classes.

The foundational component of the Core and Satellite investment strategy is a strong belief the U.S. stock market has performed well over long periods of time. Using this logic, the U.S. stock market comprises a significant portion of the overall asset allocation of the Core and Satellite investment strategy, often up to two thirds of the portfolio. With such a heavy concentration, U.S. stocks are known as the “core” position.

However, there are U.S. stock market cycles that can lead to declining performance. To help mitigate this risk, the remaining one third of the portfolio is invested in specific sectors or asset classes which hopefully provide stability in a declining market. These sectors became known as satellites.

Together, the Core and Satellite investment strategy strives to generate returns with less volatility than the overall U.S. stock market. In other words, maximizing returns while minimizing risks.

Core Component

The core position of the Core and Satellite investment strategy is designed to capture domestic stock market returns in a low cost, long term manner. A simple investment in a market index such as the S&P 500 using an index fund or exchange traded fund is common. The core position starts out around two-thirds of the portfolio and can incorporate bonds depending on the level of risk.

The core position is rooted in the philosophy that stock markets are efficient over long periods of time. Instead of focusing on how to beat the market, we focus on simply capturing as much market return as possible with the lowest tax and fee headwinds. The core position is designed for the long term and can be held for decades at a time.

Core Position

The core position is designed to capture stock market index returns such as the S&P 500.

Satellite Component

While the core position assumes stock markets are efficient over the long run, satellite position of the Core and Satellite investment strategy are designed to take advantage of short term discrepancies. Satellites are specific sector or industry positions, usually 5% to 10% of the overall portfolio, designed to boost returns or provide more downside protection. There are numerous satellites to incorporate into a portfolio. They can be individual stocks, real estate, private equity, or even collectibles. The philosophy is to invest in areas that traditionally perform differently than the core position or general market.

That said, satellite positions can be risky. They often lack diversification as they focus on a specific sector. Exposure to satellites should be limited to 5% to 10% of the portfolio.

Satellite Position

Specific sectors designed to take advantage of short term opportunities.

Which satellites to use and the amount invested in each is based on our economic outlook and research. We divide our satellites into two categories: explore and defend.

Satellite Strategies - Explore and Defend

In a growing economy, our satellite investments of the Core and Satellite investment strategy are focused on exploring new innovations and future potential. We use sectors such as start up companies, technology, and private equity/venture capital to capture up and coming new ideas and hopefully future growth.

These "explore” satellites are designed to boost returns beyond the core position. With a growth orientated mindset, we expect significant volatility to hopefully trend upwards and increase returns beyond the U.S. stock market index. However, volatility works both ways and can also lead to significant declines. We keep growth satellites to 5% to 10% of your portfolio to manage risk.

In a slowing economy, our satellite investments of the Core and Satellite investment strategy are focused on high quality and defensive sectors. We use sectors such as utilities, consumer staples, and high dividend to focus on companies with non-negotiable product lines (shampoo and toothpaste) or non-negotiable services (electricity bills).

These “defend” sectors are designed to act differently compared to the core position. With a defensive mindset, the goal is to reduce volatility and lessen the downward movements. However depending on the root cause, these sectors could very well perform in lock step or even worse than the core position.

Explore Satellites

  • Small Company Stocks

  • Technology Related Sectors

  • Consumer Discretionary

  • Industrials/Materials

  • Financials

  • Emerging Markets

  • Real Estate

  • Momentum

  • Private Equity

Defend Satellites

  • Utilities

  • Healthcare

  • Consumer Staples

  • Real Estate

  • Minimum Volatility

  • High Dividend

  • High Quality

  • International Developed

  • Private Equity

Stay Invested Through Market Cycles

We developed our Core and Satellite investment strategy to allow clients to stay invested through all market cycles. Instead of a market timing “risk on” and “risk off” approach, we tailor our portfolios to align with current economic conditions. If the economy is showing signs of growth, we invest in areas that display enthusiastic growth potential. Conversely, if the economy is showing signs of slowing down, we want to preserve principal and minimize downward pressures.

We believe the Core and Satellite investment strategy provides flexibility if our outlook has missed the mark. We very well could be wrong with our positioning or misinterpreting economic signals. The Core and Satellite investment approach can still perform well even if your positioning is untimely based on the core position comprising over half the portfolio.

Core and Satellite investment research

On top of the research we do for sector positions, we use a collection of economic indicators to determine when to implement a defend satellite strategy or explore satellite strategy. Our research tools focus on data-driven signals. We rely less on expert opinions and prefer to use statistical probabilities, historical data sets, and leading indicators to guide our strategy.

U.S. Equity Indicators

We focus on three main data points for the S&P 500: earnings, price target, and valuation.

The S&P 500 earnings data set is a macro-based earnings model that provides a 12-month forecast of the direction and magnitude of corporate earnings growth. The indicator is based on a combination of inputs that historically exhibit a high statistical correlation with future S&P 500 earnings growth.

The S&P 500 real-time price target model combines two well-known fair value frameworks: equity risk premium, and cost of capital. The real time price target is calculated as the average of the equity risk premium and cost of capital price targets.

The valuation model is based on the theory that investors require a risk premium as compensation for investing in equities, which are inherently riskier than bonds. We forecast the appropriate equity risk premium, risk free rate, and earnings per share to arrive at a fair value estimate.

U.S. Economic Indicators

We focus on four main data points for the U.S. Economy: business cycle, inflation, unemployment rate, and consumer health.

The business cycle indicator aggregates key macro data points to identify the current stage of the economic cycle. The indicator classifies the environment into one of four business cycle stages: Early Cycle (Recovery), Mid Cycle (Expansion), Late Cycle (Slowdown), and End of Cycle (Contraction).

The inflation indicator forecasts the direction and approximate magnitude of changes in the headline U.S. consumer price index (CPI) over the next three months. These indicators use macroeconomic inputs that have been shown to have a high statistical correlation with future inflation trends.

The U.S. unemployment rate indicator is built to forecast the direction and approximate magnitude of changes in the U.S. unemployment rate over the next 12 months.

The U.S. consumer health indicator is a macro-based model that provides a quick snapshot of U.S. consumers' ability (or lack thereof) to spend money on goods and services. The indicator is a combination of five consumer-related inputs: labor markets, net worth, personal income, household debt, and sentiment.

U.S. Credit Indicators

We focus on three main data points for the U.S. credit markets: net liquidity, lending standards, and financial conditions.

The net liquidity indicator measures current liquidity dynamics in financial markets. The indicator tracks liquidity changes based on three key components: total assets on the Fed's balance sheet, the Fed's overnight reverse repurchase agreements, and the Treasury's general account.

The U.S. lending standards indicator is built to forecast the directional trend and year-over-year change in the net percentage of banks tightening lending standards.

The U.S. financial conditions indicator is a barometer of several macro factors that influence the availability and cost of credit, liquidity in financial markets, and overall economic health.

Flat Fee Investing

As great as an investment strategy may be, traditionally any benefits to the investor can be eaten away with significant fees. Our flat fee investing approach is not based on how much money you have or make. It is simply based on the complexity of your situation.

Your flat fee is incorporated with your financial planning fee to create one flat monthly or quarterly fee. Compared to percentage fees, flat fee investing has the potential to keep more of your portfolio invested.

Investment Services

  • Tax Loss Harvesting

  • Rebalancing

  • Performance Reporting

  • Client Portal

  • Alternative / Private Equity

Flat Fee Pricing

We provide full service investment management without the high and rising costs associated with percentage fees.

We believe our strategy, research, and flat fee pricing structure provide the foundation to invest through all market cycles and create significant wealth over time.

Learn More About The Core and Satellite Investment Strategy.

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