Case 048Client situations and behaviourCore

A client complains his portfolio made 6% while a friend made 18%. His mix is 40% equity; the friend was all in small caps that fell 35% the year before. Build the like-for-like comparison and the conversation.

The situation

Tushar Amladi, 57, calls unhappy. His portfolio, 40% diversified equity and 60% debt, made 6.0% this year. A friend at his club made 18% with everything in small-cap funds. Tushar asks why he is paying for advice that earns a third of what his friend made.

You check the history. Last year Tushar's equity fell 15% and his debt earned 7%, so his portfolio returned -1.8%. The friend's small-cap funds fell 35% last year before this year's 18%. Tushar's own benchmark, 40% of a broad equity index and 60% of a debt index, returned -1.4% last year and 6.4% this year.

Your task

Build a fair comparison of the two portfolios, compare Tushar with the right yardstick, and say how you would run the conversation.

Quick check

Over the two years, where is the friend's Rs 100?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Over the same two years Tushar's Rs 100 is worth about Rs 104.1; his friend's is worth about Rs 76.7. The 18% came after a 35% fall and still leaves the friend down 23%. The fair yardstick for Tushar is his own benchmark, about Rs 104.9, which he trails slightly, and that gap deserves an honest look. The conversation compares the same risk over the same period, then returns to his goals.

Step 1What makes the comparison unfair as it stands?

Comparing one year of two portfolios is like comparing two drivers by who went fastest on the last stretch of road, when one of them crashed on the stretch before. A fair comparison needs the same period and the same risk; this one uses a single good year for the friend and ignores both the fall before it and the very different risk each man took. Tushar holds 40% equity by design, because at 57 he needs the money to be there in a few years; his friend holds 100% small caps.

Step 2How do the two years look side by side?

Chain the returns from Rs 100. Tushar went to Rs 98.2 and then Rs 104.1; his friend went to Rs 65 and then Rs 76.7. The friend's 18% is a large rise on a smaller base, and he still needs about 30% more just to get back to where he started. Tushar's 6% looks small only because the year-one fall that made the friend's rebound possible never happened to him on the same scale.

Rs 100 over the same two years: this year's 18% sits on last year's -35%708090100110StartEnd of last yearTodayfriend: -35%, to 65+18%, to 76.7Tushar 104.1Tushar -1.8%his benchmark 104.9The friend needs a further 30% just to get back to 100.
From Rs 100 two years ago, Tushar's 40% equity portfolio is at about Rs 104.1 and his friend's small-cap portfolio at about Rs 76.7, because the friend's 18% this year followed a 35% fall; Tushar's own benchmark is at about Rs 104.9.
Step 3What is the right yardstick for Tushar?

His own benchmarkAn index or mix of indices with the same risk as the portfolio, used to judge whether the manager added or lost value., not his friend. Against 40% broad equity and 60% debt, his portfolio returned -1.8% against -1.4% last year and 6.0% against 6.4% this year, about 0.8 points behind over two years. Say that honestly. The friend comparison is unfair to Tushar, but the benchmark comparison shows a small shortfall that the adviser should explain, for example through fund choice or costs.

Rs 100 two years agoLast yearThis yearValue today
Tushar, 40% equity-1.8%+6.0%104.1
His benchmark-1.4%+6.4%104.9
Friend, 100% small caps-35.0%+18.0%76.7
Over two years Tushar is about 27 rupees per 100 ahead of his friend but about 0.8 behind his own benchmark, which is the comparison that actually tests his adviser.
Step 4How do you run the conversation?

In four moves, and without making the friend wrong. Acknowledge the feeling: seeing someone else make three times as much stings. Show the two-year picture above, on paper. Then own the benchmark gap and say what you will do about it. Finally, go back to his goal: the portfolio exists to fund his retirement in a few years, and the question is whether he is on track for that, not whether he won this year. If he wants more risk, that is a separate decision to make calmly, not in reaction to a club conversation.

Where candidates lose it

The common miss is defending the 6% by attacking the friend's risk and stopping there. It wins the argument and loses the client, and it hides the small benchmark shortfall the client deserves to hear about.

The arithmetic trap is adding returns: minus 35 plus 18 is minus 17. Returns compound, so the friend is down about 23%, not 17%, and the gap matters for how long he needs to recover.

What the interviewer asks next

  • Tushar asks to move 20% into small caps now. What do you say?
  • How would you present performance so this call is less likely next year?
  • What if his friend had held small caps for five years and was well ahead over that period?

Company names and figures are illustrative.