Core/Satellite Model — CIO Academy

Core/Satellite: the best of both worlds

Core/Satellite is a portfolio construction strategy where the main part of the capital (“core”) is passively invested in broad indices, and the smaller part (“satellites”) — in active alpha-seeking strategies.

Portfolio Structure

Component	Allocation	Strategy	Objective
Core	70-85%	Passive ETFs, index funds	Beta, market returns, low costs
Satellite	15-30%	Active funds, single ideas, alternatives	Alpha, niche opportunities

Why does this work?

The reality of active management — 80%+ of active managers underperform the index
Costs matter — a 1% difference in annual fees = 25% of capital over 30 years
But alpha exists — in niche, inefficient markets
Concentration of best ideas — don’t dilute alpha across the entire portfolio

Examples of Core/Satellite Structure

Conservative investor ($10 million):

Component	Instrument	Weight	TER
Core (80%)	Vanguard Total World Stock (VT)	40%	0.07%
	iShares Core US Aggregate Bond (AGG)	30%	0.03%
	iShares TIPS Bond (TIP)	10%	0.19%
Satellite (20%)	ARK Innovation ETF (ARKK)	5%	0.75%
	Gold ETF (GLD)	5%	0.40%
	Private Credit Fund	10%	1.50%

Average weighted TER: ~0.25% (vs 1%+ for a fully active portfolio)

Selecting Satellites: Criteria

Criterion	Description
Low correlation with Core	The satellite should provide diversification
Alpha potential	Inefficient market, unique expertise
Conviction	High confidence in the idea
Acceptable liquidity	Ability to exit if necessary
Controlled risk	Loss of the satellite will not destroy the portfolio

Typical Satellites

Sector bets — Tech, Healthcare, Clean Energy
Thematic ETFs — AI, Robotics, Genomics
Single stocks — high conviction positions
Alternatives — Private Equity, Hedge Funds, Real Estate
Geographic bets — EM, Frontier Markets
Factor strategies — Small Cap Value, Momentum

Managing Satellites

Rule	Recommendation
Maximum weight of one satellite	5-10% of the portfolio
Number of satellites	3-7 (focus is more important than spreading thin)
Review period	Minimum 3 years
Success criterion	Alpha > costs + tracking error

Advantages of Core/Satellite

Cost control — the major share is in low-cost ETFs
Flexibility — you can switch satellites without disrupting the structure
Psychological comfort — you have space to “play” without risking everything
Asymmetry — limited downside from a satellite’s failure, unlimited upside if it succeeds