The core plus investment strategy has become a popular approach for fixed income investing. This strategy combines passive and active management to build a diversified bond portfolio. Investors allocate a core portion to index funds or ETFs tracking broad bond markets. The satellite portion is actively managed to pursue excess returns through sector rotation, yield curve positioning, and security selection. The core provides low-cost, diversified market exposure. The satellite offers the flexibility to adapt to changing market conditions. With the right balance, core plus can enhance returns while efficiently managing risks. This strategy is suitable for investors seeking broad fixed income exposure plus tactical opportunities from an experienced manager.
Core holdings in core plus capture bond market beta
The core component in a core plus strategy is generally invested in index funds or ETFs benchmarked to investment grade bond indexes, such as the Bloomberg US Aggregate Bond Index. This provides low-cost, passive exposure to various fixed income sectors like governments, corporates, and securitized debt. The core holdings capture the beta of broad bond markets and constitute 50% to 70% of the total portfolio. Maintaining a sizable core allocation ensures proper diversification and mitigates risks from the active satellite’s potential underperformance.
Satellite actively manages sector exposures and security selection
The satellite portion in a core plus strategy is actively managed by the investment manager. Unlike the fixed core allocation, the manager can shift capital between sectors and individual securities to pursue excess returns. For example, during periods of rising rates, the manager can shorten portfolio duration or increase allocations to inflation-linked bonds. The manager can also overweight attractive sectors or securities perceived to be undervalued. The satellite constitutes 30% to 50% of the total portfolio. Its flexible nature allows tactical positions to complement the core’s disciplined market exposure.
An appropriate balance between core market beta and satellite alpha
Finding the right mix between the core and satellite is important for core plus strategies. A sizeable core allocation (50%+) ensures stable returns from diversified market exposure. But an overweight satellite risks diluting those returns if active bets underperform. Conversely, minimal active risk from a very small satellite negates the alpha benefits of the flexible mandate. Historical results indicate that a 60/40 or 70/30 split provides an appropriate balance for bond investors seeking broad-based returns plus incremental alpha.
Suits moderate risk-tolerance fixed income investors
The core plus approach suits investors with moderate risk appetites looking for an attractive risk-return profile. The core mitigates volatility from active management mistakes or unfavorable bond market moves. The satellite provides potential to modestly enhance total returns through proven managers. Core plus also offers simplicity for investors wanting fixed income exposure through a single portfolio versus owning separate passive and active funds. But investors close to retirement may prefer more conservative pure passive bond funds to minimize risks.
The core plus investment strategy has emerged as a popular balanced approach to fixed income investing. By combining low-cost, diversified market beta in the core with flexible sector/security selection in the satellite, it seeks to deliver bond market returns plus incremental alpha. For moderate risk-tolerance investors, core plus can be an efficient total portfolio solution for accessing both passive and active strategies.