Pension funds that use a “core-and-satellite” approach to investing are among the minority, but they aren’t in any rush to abandon their policies.
Of plan sponsors surveyed by Institutional Investor, 41.9 percent say they use this strategy, which usually consists of a core group of conservatively managed assets surrounded by a higher-flying set of satellites, or smaller, riskier investments like hedge funds and private equity. The portion of managers claiming to use this style is up slightly from the 40 percent who say they did two years ago.
Proponents of this investment style believe that they’re well positioned - possibly because of today’s treacherous markets. Of the core-and-satellite users, 41.5 percent say the strategy is more effective now than it was two years ago, while 53.8 percent report that it’s just as effective as it was at that time.
One person’s core is another’s satellite, according to the survey results. More than 39 percent of the respondents say that their core consists of passively managed bonds and equities, while their satellites include actively managed equities and smaller, niche investments. At the same time, 40.4 percent say actively and passively managed equities and bonds constitute their basic investments, while smaller, niche investments are the riskier portions of their portfolios.
And those aren’t all the possibilities. Nearly 9 percent of the funds that say they use a core-and-satellite strategy include private equity investments, which are neither conservative nor passively managed, in their core.
According to the survey, most plans - 68.4 percent - received the proposal to put nontraditional assets like private equity and emerging-markets investments in their core holdings from their in-house staff. Just 15.8 percent received the proposal from their consultants.
Do you use a “core and satellite” strategy?
Yes 41.9%
No 58.1
How do you define a core-and-satellite strategy?
Actively managed equities and bonds plus a set of smaller, niche investments like private equity and real estate 10.1%
Passively managed equities and bonds plus a set of actively managed equities and smaller, niche investments 39.3
A combination of actively and passively managed equities and bonds plus smaller, niche investments 40.4
Other 10.1
If you do use such a strategy, which of the following instruments do you have in your core?
Large-cap U.S. equities 98.3%
Midcap U.S. equities 53.4
Small-cap U.S. equities 62.1
U.S. investment-grade corporate bonds 70.7
U.S. high-yield bonds 13.8
International equities 56.9
International fixed income 10.3
Emerging-markets holdings 8.6
Private equity, including venture capital 8.6%
Asset-backed securities 8.6
Futures 3.4
Did you use a core-and-satellite strategy two years ago?
Yes 40.0%
No 60.0
In which of the following instruments do you invest outside your core?
Large-cap U.S. equities 43.6%
Midcap U.S. equities 49.1
Small-cap U.S. equities 69.1
U.S. investment-grade corporate bonds 21.8
U.S. high-yield bonds 38.2
International equities 54.5
International fixed income 23.6
Emerging-markets holdings 34.5
Private equity, including venture capital 30.9
Asset-backed securities 29.1
Futures 14.5
If you have put some nontraditional holdings in your core over the past few years, who proposed doing so?
Plan staff 68.4%
Outside manager(s) 5.3
Consultant(s) 15.8%
Other 10.5
If you haven’t put nontraditional holdings in your core, are you considering doing so?
Yes 15.4%
No 84.6
If you hold the same type of securities in both core and niche portfolios, are they run by the same manager(s)?
Usually 16.0%
Sometimes 14.0
Rarely 34.0
Never 36.0
If you hold nontraditional securities in your core, how are they run?
Separately, by specialists 75.0%
As part of a large manager’s broad-based mandate 25.0
Other 0.0
How would you evaluate the effectiveness of your core- and-satellite strategy?
Very effective 20.7%
Effective 62.1
Satisfactory 17.2
Unsatisfactory 0.0
How effective is your strategy compared with that of two years ago?
More effective 41.5%
As effective 53.8
Less effective 4.6
The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.
