Blue Sky and Portfolio Performance Anxieties
B
lue 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.
Rajesh Nair (Rajesh) is an MBA from a reputed
business school who joined Blue Sky during the
recessionary times and has done well thanks to
investor focus on cost reduction, leading to
improving business for Blue Sky. Though
investors were appreciative of Blue Sky’s approach
to investing, some of them started complaining as
recent portfolio performance was below the mark.
Rajesh was meeting one such demanding investor,
Mr. Shah (Shah), who
was of view that recent recommendations from
Blue Sky were not up to the mark and had
generated below par returns. Purpose of the
meeting was to discuss concerns with the client
and realign the portfolio, if required.
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. How were fund managers generating 3%
return by investing in Government bonds
which were generating returns anywhere
between 8% and 9% per year?
3. Equity portfolio had underperformed the
broader mutual fund industry. Though, it
had generated return in line with
market performance, it was still sub-par as
compared to many known Mutual Funds in
the market.
4. Shah opined that allocation to gold was not
required at all at a time when Government
is seeing it as a drain on country’s Forex
reserves. It was expected that they would
bring prices down. Also, though you call it
an inflation hedge, gold prices have
actually come down in an inflationary year.
Rajesh agreed with Shah and explained the
rationale behind recent investment advice. He
read out the
rationale from the firm’s publications while
showing various charts/tables to support his
rationale.
1. Blue Sky had asked investors to increase
exposure to long dated fixed income
instruments as it was expecting yields to
come down in near future (Exhibit I). Blue
Sky believed that it was an ideal time for
investors to play duration.
3. Blue sky advised investors to continue to
have a part of the portfolio invested in
gold. The company believed that gold is an
inflation hedge as well as a hedge on global
shocks (Exhibit III).
Exhibit III: Gold vs Inflation

Exhibit I: 10-year Bond Yield Chart

Source: Bureau of Labor Statistics, Yahoo! Finance

Shah acknowledged the information provided

but was still not satisfied with the answers. He
Source: www.bloomberg.com suggested that Rajesh should discuss the concerns
with the senior members of his team and update
2. Blue sky believed in efficient market
him with a detailed plan.
hypothesis and that cost of taking active
risk was not sufficiently compensated by
active returns and investors were better off
investing in Exchange traded funds as against
actively managed funds (Exhibit II).
Exhibit II: Divergent Performance of Actively
Managed Funds
Scheme 1 Month 6 Months 1 year 3 years
Returns Returns Returns Returns
(%) (%) (%) (%)

Reliance Small 46.86 60.95 115.36 26.42

Cap Fund (G)
Birla Sun Life Pure 52.3 80.67 105.25 26.78
Value Fund (G)
ICICI Pru MidCap 38.73 53.46 96.62 20.71
Fund (G)
Nifty 3.71 24.8 32.1 37.63
Principal Services 3.38 -6.84 -6.06 1.51
Industries Fund (G)
Kotak LifeStyle -2.12 2.97 -8.38 10.43
Fund (G)
JM Emerging -4.6 -4.83 -16.98 -12.02
Leaders Fund (G)

Source: https://www.amfiindia.com/, July 5th 2014