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Core and Satellite

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“Asset allocation constitutes the most important step in portfolio construction, accounting for more than 90% of the variability in portfolio performance over time...”

G.P. Brinson, B.D. Singer, G.L. Bebower: Determinants of Portfolio Performance

Although we believe cost-effective strategic asset allocation is the most important step in portfolio construction, we recognise that “one size does not fit all”, as each client has their own specific circumstances to cater to. 

Financial Partners was amongst the first financial advisers in Hong Kong to implement a ‘Core and Satellite’ portfolio strategy for its clients. This strategy brings together medium term benefits of strategic asset allocation with clients’ shorter-term desires and/or needs for tactical allocations.

To ensure the overall portfolio retains its desired risk adjusted return characteristics, the core holdings (a significant portion of the portfolio) would consist of our proprietary strategic holdings. The remaining satellites would be allocated for investment as the result of a ‘brainstorm’ with each client, and could include investments directed by a range of opportunities such as China, Commodities, Alternative Investment Strategies, ETFs or even contrarian views. The result is a highly tailored portfolio, reflecting each client’s appetite for risk and tactical desires.

A summary of core allocation benefits

Our recommended core holdings have evolved into structures that benefit from:

1. High exposure to base currency

Research shows that unduly high exposure to foreign currency merely adds to short term volatility without generating any meaningful outperformance.

2. Diversification of asset classes

In terms of the ‘efficient frontier’, our diversification approach reduces volatility without unduly affecting expected returns.

3. Sensible tolerance limits for tactical asset allocation

The asset allocator’s house view can be reflected in the strategic portfolios, only within pre-defined benchmarks. This enables performance to reflect short term opportunities; however, at no point will the risk profile markedly change.

4. Diversification by manager and style

Managers are complimentarily blended to improve risk-returns characteristics.

5. Avoidance of single manager hedge funds or highly leveraged products

Most high risk investments ultimately end in failure and disappear from all performance databases, thus creating a ‘survivorship bias’.

6. Avoidance of derivative strategies used purely for speculative purposes.

Except when it is contained in a well diversified fund-of-hedge-funds strategy, such speculative investment is avoided.

7. Avoidance of simulated track records

All investments are thoroughly researched by analysts and an explainable track record is required. 

To arrange a meeting with one of our Trusted Advisers, please contact us on .