Is direct investment better than index funds?
B. Venkatesh Readers may be aware of the core-satellite approach to portfolio management. This involves constructing a core portfolio for the beta (market) exposure and a satellite portfolio for the alpha (excess) returns. There were couple of interesting questions that we recently addressed for an investor who wanted to structure such a portfolio. The investor’s questions were two-fold. One, can the core portfolio be constructed through direct investments instead of with index funds? Better still, can it be constructed with index futures? And two, how should an investor manage the portfolio, resisting the temptation to move stocks between the core and the satellite portfolio? We address these issues, showing why index funds are a better choice for the beta exposure. We also suggest how investors can set-up a system that will enable them to resist the desire to move stocks between the core and the satellite portfolio. Constructing core portfolio The objective of a core portfolio is to
