Core and satellite investing a superior alternative to funds management

Investing in carefully selected satellite investments is the “best way” to generate alpha, representing a superior alternative to traditional funds management, according to Tony Rumble, director of fund manager Alpha Structured Investments.

Rumble believes financial advice combining a ‘core plus satellite’ approach will “become the norm in future”, as more investors realise it is unlikely traditional investment managers can often outperform their benchmark after fees.

“There’s a growing awareness it can be more efficient to generate market “beta” by investing in the benchmark index itself, for a cost which may be up to 10 times less than paid to the traditional fund manager.”

The core plus satellite approach relies on making a range of benchmark unaware investment decisions into assets and markets that are capable of producing outperformance returns, Rumble said.

“Care must be taken to minimise fees, maximise tax efficiency and enhance risk control, which paves the way for the use of capital protected investments that outperform,” he said, in a paper to be presented at the PortfolioConstruction Conference this month.

“Well designed capital protection allows for better diversification and avoidance of the low returns generated by reliance on traditional portfolio construction methods and investments, such as traditional managed funds.

“It delivers a range of investor benefits including certainty of outcome and full access to investment upside, with minimal or zero downside (depending on the type of protection utilised),” he said.