Funds adopt core/satellite investing strategy

Cost pressures are driving super funds to adopt core/satellite investment strategies, Jamie Nicol, Dalton Nicol Reid's chief investment officer said.

Core/satellite approaches to investing had gained traction over the past 12 months and were currently the "flavour of the month", Nicol said.

He said super funds were cutting fees by bringing the core investing in-house and outsourcing the satellite investing to active, alpha-seeking managers.

"You're not paying fees for 10 per cent holding in BHP where it costs three managers…and you can concentrate your portfolio on some high alpha generating fund managers," he said.

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"Some of them are bringing (investment) in-house and managing a certain part of their Aussie equities themselves, and that's really the core - then they'll look for extra alpha-producing active managers such as ourselves as a satellite," he said.

Nicol said core/satellite approaches were the domain of the bigger funds, which had a higher propensity for running into capacity difficulties issuing mandates, and which also had more resources to bolster internal capabilities.

"As it (a superannuation fund) gets larger, it's going to get difficult to find fund managers that have the capacity to do the job.

"It would be difficult to produce alpha on the amount of money they have to invest, so if they have some core money invested largely in index style, and then look for satellite-type managers to deliver some excess return, then that seems like a reasonable approach," he said.

Nicol said strategies often operated in cycles, so it was unclear if it was just a fad.

He said if internal investing teams were unable to generate the expected performance, funds would probably outsource the function again.