Blue Sky and Portfolio Performance Anxieties

Blue Sky and Portfolio Performance Anxieties

Blue Sky is an investment advisory and financial planning firm known for its ability to provide quality advice for individual investors as well as corporate treasuries. Company seems to have found a niche business model for itself whereby it specializes in minimizing investment cost for individual investors & corporate treasuries. Everything seems to be going its way in an economy which is slowing down reflected by a minimal investment return from various investment avenues over the last 5 years. Investors were now increasingly focused on cost reduction as an instrument to optimize investment returns. Unlike other investment firms in the market, Blue Sky charges its clients with fixed annual fees negotiated at the time of client acquisition...................

During their scheduled meeting at the client, Shah’s residence, he voiced his concerns about his portfolio performance with the following comments to Rajesh:

1. Fixed income portfolio which mostly included income funds, has generated just 10% return in last 3 years. It would have been better if the amount was put into fixed deposit with a bank which would have generated return/interest anywhere in the range of 8%–9%.

2. ....................

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Exhibits

Exhibit I: 10-year Bond Yield Chart

Exhibit II: Divergent Performance of Actively Managed Funds

Exhibit III: Gold vs Inflation

Blue Sky and Portfolio Performance Anxieties

Synopsis

This caselet depicts a normal day in the life of an investment advisor Rajesh. Asset classes do not necessarily perform in the way an advisor will expect and can cause aversion from the client. Additionally, all clients would like to be holding best performing asset class during every period which is humanly impossible. Though, there are no perfect answers to clients’ questions, it is the responsibility of the advisor to provide an educated reply and emphasize on the principle of diversification.

This caselet can be used to achieve following learning objectives:-

• a. Developing an understanding of Indian Equity Markets: Equity markets have gone through phases of sustained up moves and down moves. This performance variance can be explained by various underlying indicators. Though history may not be necessarily expected to repeat itself in future, learning about historical market cycles may be the best guiding light while trying to estimate future performance of equity markets.
• b. Understanding the concept of duration: Expecting a fixed return from fixed income instruments may seem very straightforward in short run. But, while dealing with  long dated instruments, majority of the returns in certain years may be explained by underlying movements in yields. This case study should be used to develop an understanding of what causes changes in yield and how an investor should position himself based on his/her expectations about the yield.
• c. Difference between Active & Passive investing: There is an ongoing debate on what is the best way to approach/invest in equity markets. Where active managers indicate toward some extremely successful investors & mutual fund schemes, passive investors focus on efficient market hypothesis and inability of a large number of active managers to beat the market.
• d. Portfolio Risk & Return: Investors have varying levels of risk and thus every client’s portfolio has to be different. Portfolio managers try to achieve an optimal risk return tradeoff for the client using various asset classes. Portfolio risk and returns are evaluated to determine an efficient frontier which when compared to client’s risk tolerance will result in optimal portfolio allocation.

Prerequisite Conceptual Understanding

Prerequisite Conceptual Understanding (PCU) material is the background material that would aid immensely in mapping the decision areas of this caselet and bring a synthesis amongst the relevant concepts. The participants/students should be encouraged to read the following material to benefit from the broader perspectives outlined in the caselet:

• a. Equity markets history and how they have performed during various periods
• b. Govt. securities, Bond yields and how bond prices are calculated
• c. Efficient market hypothesis
• d. Performance of Gold as an asset class

Expected Learning Outcomes

This caselet would help in achieving the following learning outcomes:

• • Define the factors that drive performance of equity markets
• • Explain the relationship between portfolios of long dated instruments with interest rates
• • Explain the concept of efficient market hypothesis
• • Explain the role of Gold in asset allocation

Positioning and Setting

This caselet can be used in following concepts/modules:

• 1. Equity Investing
• 2. Inflation & Interest Rates
• 3. Efficient Market Hypothesis
• 4. Portfolio Analysis
• 5. Financial Planning

Assignment Questions

• I. List various factors that caused underperformance of client’s equity portfolio.
• II. List various factors that caused underperformance in client’s fixed income portfolio.
• III. ....................

Suggested Orchestration

The classroom discussion and analysis was orchestrated around the following five sections –

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Exhibits

Exhibit (TN)-I: India GDP Annual Growth Rate (2004–2014)

Exhibit (TN)-II: Sensex January 2003–March 2004

Exhibit (TN)-III: Sensex January 2005–April 2006

Exhibit (TN)-IV: Sensex 2007–2009

Exhibit (TN)-V: Sensex 2012–2014

Exhibit (TN)-VI: Relationship between Price of Fixed Income Instruments and Interest Rates

Exhibit (TN)-VII: India Government Bond (10 years)

Exhibit (TN)-VIII: Sensex and BSE Index (6 months)

Exhibit (TN)-IX: Sensex and BSE Index (3 Years)

Exhibit (TN)-X: Gold Inflation (1992–2012)