Tailor-made thematic portfolios: a core satellite optimization

Florian Methling () and Rüdiger Nitzsch ()
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Florian Methling: RWTH Aachen University
Rüdiger Nitzsch: RWTH Aachen University

Journal of Global Optimization, 2020, vol. 76, issue 2, No 5, 317-331

Abstract: Abstract In recent years, thematic exchange-traded funds have arisen and broaden the narrow thinking of purely monetary driven investment decisions. Ethical concerns, a stronger belief in society-shaped trends, or the conformity with personal convictions motivate investors to include non-monetary objectives in so called thematic funds. Thematic investors follow a modified core satellite strategy in which conventional funds ensure diversification. Investors’ non-monetary interests manifest within additional satellite funds. Both portfolios are separately allocated so that inter-portfolio correlation effects are not considered and inefficient core satellite portfolios are allocated. However, in order to reduce the inefficiency of such a core satellite strategy, this study addresses fund providers and develops the idea of tailoring thematic funds to conventional ones. An empirical investigation shows that by easing the efficiency constraint for the satellite portfolio, correlation effects between the portfolios can be exploited. At the expense of an average relative volatility increase of 4.55%, the inefficiency of core satellite portfolios can be reduced by an average of 11.74% compared to volatilities of efficient tri-criterion portfolios. Further analysis of these thematic products shows that tailored products can also be more concentrated within a given theme. This opens up new opportunities for fund providers to become more involved in various thematic trends and at the same time achieve better performance for core satellite investors.

Keywords: Multi criteria decision making; Portfolio management; Thematic investing; Finance (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10898-019-00781-2

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