Blended Management

Question 1

Core Portfolio

Answer 1

Made up of passively-managed securities (index funds, ETFs, passive mutual funds) and uses a traditional benchmark.

The core funds may have a particular investment style bias.

Because of the holding’s passive nature and the belief that this structure allows for longer-term
planning and growth, they are often only sold if the client needs cash for personal use, the allocation is out of bounds.

Question 2

Satellite Portfolio

Answer 2

This will comprise holdings that the adviser expects will outperform the market.
These are typically equities and alternative assets although it can be used for fixed-interest securities such as high-yield bonds,
emerging market debt and individual bonds.

Question 3

Smart Beta

Answer 3

The objective of smart beta funds is to overcome the main drawback of passive funds, which
automatically follow the ups and downs of the market, and cannot avoid exposure to any troublesome
holdings.

This is achieved through the creation of a custom benchmark consisting of stocks that exhibit certain behaviours (eg, low volatility, value, or momentum).

Question 4

Smart Alpha

Answer 4

Smart alpha funds aim to benefit from an investor’s best investment ideas, independently of market movements.

The way in which smart alpha works is very similar to smart beta, in that an investor creates
a custom benchmark (active) that tracks their best investment ideas (passive).

A key difference, though, is that the index’s exposure to the wider market (ie, beta) is hedged out, thus enabling the strategy to
capture pure alpha.