FIGURE 32.2 Uniform Equity Portfolio Structure versus Core and Satellite Structure folio can take advantage of these entities. The core and satellite approach takes a large component of the equity allocation and creates a tax-efficient core portfolio that does not require the shield of a tax-advantaged entity. This allows more scope for placing the tax-inefficient investments within the tax-advantaged entities. We introduced Mr. Smith in the preceding chapter. He controls $155 million in assets. Of this, $80 million is in tax-advantaged entities. If he had a 60 percent allocation to equities, the total equity holdings would be $93 million. It will not all fit within the tax-advantaged entities. But, if he adopted a core and satellite structure with 50 percent of the equity holdings in the core, he could hold the core in his personal account. There would be $46.5 million in satellite portfolios. These could all fit within the tax-advantaged entities and still allow room for hedge funds or other tax-inefficient asset classes. Let us compare after-tax wealth generation between the two structures shown in Figure 32.2. In the uniform structure there are three active strategies. Each runs a diversified portfolio with an expected tracking error of 5 percent. The three managers are given identical amounts and their strategies are uncorrelated. The tracking errors will tend to net and the overall tracking error to the benchmark is 2.89 percent. In the core and satellite structure, 50 percent of the equity allocation is put into an index strategy. The remainder is divided equally among the three managers. Each manager will have a 10 percent tracking error. The overall expected tracking error should also be 2.89 percent. We will analyze these two structures in the context of Mr. Smith's desire to maximize the future value of his foundation. In the preceding chapter, Mr. Smith's menu of investment choices included public equity. We will assume that was in the uniform structure. We shall now add two additional choices, as described in Table 32.5. TABLE 32.5 Three Equity Strategies Pretax Return After-Tax Return Pretax Volatility After-Tax Volatility Annual Turnover   Uniform 9.75% 8.00% 17.24% 16.40% 30% Core index 9.00 8.16 17.00 16.06 5 Satellite aggressive 10.50 8.39 17.95 16.40 50