Core And Satellite

Cheveley Partners builds client equity exposure by placing roughly 75% in low-cost broad index funds and the remaining 25% in a handful of concentrated active managers plus a small private credit sleeve. This CORE-AND-SATELLITE construction is chosen mainly because it:

1. A.Guarantees the portfolio will beat its benchmark, because the satellite managers can only add returnActive satellites can and do subtract return. No structure guarantees outperformance.
2. B.Holds down aggregate cost and deviation from the benchmark by indexing the bulk of the portfolio, while confining higher fees and active risk to a deliberately sized minorityCorrect. The structure is about budgeting active risk and cost, not about guaranteeing outperformance.
3. C.Removes the need for an investment policy statement, because the core is passively managedThe IPS governs objectives, constraints and the allocation itself. Passive implementation makes it more useful, not unnecessary.
4. D.Eliminates market risk, because index funds are not exposed to market declinesAn index fund falls with its index. Indexing removes manager risk, not market risk.

Why: A core-and-satellite portfolio indexes the majority of the assets, which holds down the aggregate expense ratio, turnover and deviation from the benchmark, and then confines active risk and higher fees to a deliberately limited satellite allocation. The client still bears full market risk on the core, and the satellites may underperform. The approach controls the SIZE of the active bet rather than promising that the bet will pay.

An adviser builds portfolios with roughly 75% in broad low-cost index funds and the remainder in a few concentrated active and specialty strategies. This construction approach is best described as:

1. A.Tactical asset allocationTactical allocation shifts weights to exploit short-term opportunities, which is not described here.
2. B.Core-satellite portfolio constructionCorrect. A large indexed core with smaller active satellites is the core-satellite framework.
3. C.Portfolio immunizationImmunization matches bond duration to a liability horizon and is unrelated to this structure.
4. D.Dollar-cost averagingDollar-cost averaging is a contribution schedule, not a portfolio construction method.

Why: A core-satellite approach places the bulk of assets in a low-cost, broadly diversified core, usually indexed, and surrounds it with smaller satellite positions in active or specialized strategies intended to add excess return or targeted exposure. The design keeps overall expenses and tracking error modest while confining active risk to a defined portion of the portfolio. It is a portfolio construction framework rather than a market-timing strategy.