The secret of successful investment lies in the heavens. That, anyway, is the view of the increasing number of investment institutions adopting a "core-satellite" approach to equity markets. The emergence of this celestial strategy is generating plenty of heat as well as light in the normally staid world of pension-fund investment. The question facing private investors is whether they should emulate it.

For decades, big pension funds have put their faith in "balanced" fund managers, jacks-of-all-trades who looked after everything from stocks and shares to property and cash. The big names of UK asset management - Schroder, Mercury, Phillips & Drew made their names as balanced managers. But research suggests that better results can be achieved by dividing the portfolio into discrete segments and hiring specialist managers to look after each.

In a core-satellite strategy, a pension scheme will invest 70 to 80 per cent of its assets in an index-tracking fund run by a computer. Here, the aim is not to beat the stock market but to shadow it at every turn while keeping costs to a minimum. Specialist fund managers are hired around this "passive core" as "satellites" to invest in sectors where index-tracking techniques are difficult to apply such as smaller companies or emerging markets.

Ms Sally Bridgeland, head of investment research at Bacon & Woodrow, explains: "Having a core passive manager and a really active satellite manager is similar to putting all your money with a moderately active manager. But, because passive managers are cheaper, you're doing it in a more cost-effective way."

How many pension funds have adopted this approach? No one knows for sure. In Britain for example, about 25 per cent of all pension-fund assets are held in tracker funds, and 49 per cent of funds use trackers to some extent. These percentages are rising.

Says Mr Bridgeland: "Perhaps private investors have something to learn from this. There are good reasons why so many schemes are opting for a passive core to their equity portfolios. Once charges are taken into account, passive management looks like a better means of capturing long-term capital growth in the relevant economies or sectors."

Hard research backs this up. Figures from the WM Company, which measures the performance of institutional investors, show that actively-managed portfolios lag behind indexed portfolios by an average of 0.5 per cent a year. The lag is even greater once costs are taken into account.

Good fund managers do have a part to play in core-satellite strategies, but they are asked to stick to sectors in which specialist knowledge and original research really does pay off. Mr Matthew Annable, head of active equity strategies at fund manager, BGI, points out: "In both inefficient markets and relatively narrow investment sectors such as smaller companies, venture capital or property there will be information avail able to managers which allows them to beat indices."

So, should private investors reshape their portfolios into a core-satellite structure? There are certainly strong arguments in favour. First, the old distinction between income and growth, on which most private client portfolios is based, has started to look outdated.

The cost advantage of trackers over traditional growth or income funds is huge. The cheapest trackers available to individuals charge 0.5 per cent or less annually. Most actively managed funds charge an eye-watering 1.25 to 1.5 per cent. Are your actively-managed unit trusts really performing well enough to justify this extra cost?

The initial charges by actively managed unit trusts are also high. Many levy up to 5 per cent, which makes it costly to switch between funds. In contrast, trackers tend to make no entry or exit charges.

Mr Bridgeland says: "Charging structures make it relatively inexpensive to move in and out of tracker funds. There should also be less reason to make changes to a passively managed core if it reflects your choice of asset allocation for the medium to long term."

Reduce the cost of the core by investing in trackers and you can afford to spend more on actively managed satellite funds. For wealthy private investors, this might include selective use of hedge funds, which charge high fees but promise to deliver consistently strong investment returns.

The advantage of using the core-satellite model is that it gives investors a clear benchmark the performance of the core against which to judge the performance of these satellite funds. If a satellite fails consistently to outperform your core index tracker, it is time to ask whether it should be ditched.

Not every private investor will want to go into orbit with a coresatellite portfolio. But it is significant that pension funds and their advisers are getting tired of the jack-of-all-trades approach. As Annabile Annable notes: "You cannot simply transfer the coresatellite paradigm to a private investor's portfolio as, in practice, their requirements may vary a good deal. But there is a good deal to be said for considering it as a starting point."