Optimising portfolio construction for managed accounts

The core-satellite approach: A strategic framework

Another portfolio construction strategy that allocators may consider is a well-structured core-satellite approach to optimise risk allocations, cost efficiencies, and opportunities to produce excess returns over the benchmark.

The core-satellite approach combines broad-based, low-cost, low-turnover passive investments like index funds and ETFs (the core) with targeted, actively managed funds or specific assets aiming to outperform (the satellites). Key benefits of this strategy include cost efficiency, diversification, and flexibility.

In terms of portfolio implementation, core allocations may include domestic and global large-cap equities and large broad-based bond markets, real estate investment trusts, and listed infrastructure.

Examples of potential satellite high-alpha markets include small/mid/micro caps and below investment grade bonds and loans. A common guideline is to allocate 60 per cent to 70 per cent of the portfolio to the core component, with the remaining 30 per cent to 40 per cent dedicated to satellite allocations.

Alternatively, some managed account solutions now offer a professionally managed core-satellite option in a single off-the-shelf solution that utilises the ‘full toolkit’ of active, passive, or enhanced smart beta building blocks. This means portfolio construction becomes an exercise of prioritising the right mix of strategies at a mid-point fee budget.

This limits the need to hold multiple managed accounts to achieve the desired outcome, resulting in unintended duplication of holdings and the risk of conflicting house views on asset allocation.

Optimised portfolio implementation

Efficient portfolio implementation is another factor that must be considered to ensure optimal portfolio performance. The quality and cost of trade execution directly impact performance. Poor execution can erode returns, and different platforms display materially different levels of trade efficiency and execution quality, which, if not managed carefully, can cause performance slippage and leakage.

Conclusion

Investment Trends research revealed 56 per cent of advisers are already leveraging these solutions by directing two-thirds of new client funds into managed accounts.

According to the IMAP Millman Census report, the Australian managed accounts sector has surged past $233 billion in funds under management as of 31 December 2024 and is projected to exceed $470 billion by 2030.

This shift highlights the efficiency and appeal of managed accounts, which offer access to diversified professional portfolio management without the administrative and compliance burdens associated with individual investments.

Optimising portfolio construction in today’s dynamic investment climate demands a sophisticated approach. It involves balancing cost efficiency, risk management, and alpha potential to enhance client outcomes.

Frances Taylor is executive director, managed accounts for Colonial First State.