RT Journal Article
SR Electronic
T1 Core Versus Satellite: <em>How Much Should a Taxable Investor Allocate to the Core Equity Portfolio?</em>
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 35
OP 43
DO 10.3905/jwm.2017.19.4.035
VO 19
IS 4
A1 Paul Bouchey
A1 Mahesh Pritamani
YR 2017
UL https://pm-research.com/content/19/4/35.abstract
AB This article examines the question facing taxable investors: How much of the equity portfolio should be invested in a tax-managed core portfolio versus active satellite managers? Historical simulations, which vary the level of active management skill, demonstrate the trade-offs between excess returns, turnover, and taxes. The authors’ results suggest that even in the presence of skilled active managers, the allocation to the core portfolio should exceed 50% for most investors. For taxable investors with moderate levels of aversion to risk, they find that the optimal allocation to the core portfolio should typically be greater than 50%, even if one expects satellite managers to deliver pretax excess returns of up to 4%. If investors are highly risk averse or expect lower levels of alpha from the satellite managers, then the optimal allocation is higher.TOPICS: Portfolio theory, portfolio construction, legal/regulatory/public policy, performance measurement