Consistent Compounders PMS

Overview

Marcellus’ Consistent Compounders PMS invests in a concentrated portfolio of heavily moated companies that can drive healthy earnings growth over long periods of time. Portfolio construction involves a two-stage process:

1. A filter-based approach to create an investible universe of 25-30 stocks
2. In-depth bottom-up research of such companies in the universe to assess sustainable competitive moats to build a portfolio of 10-15 stocks that deliver healthy compounded earnings growth over long periods of time.

While the filters are applied annually, companies in the portfolio and in the coverage universe are monitored for sustainability of moats on a continuous basis through extensive primary and secondary research. Please check our newsletters (here and here), for a detailed discussion on some of the frameworks adopted in our research process on an ongoing basis.

The filter-based approach

We create a list of stocks using a twin-filter criterion of double-digit YoY revenue growth and return on capital higher than the cost of capital, each year for 10 years in a row. Next, we build a portfolio of such stocks and hold them patiently for long periods of time, with very little churn. The filter-based approach has three key features:

• By “filtering in” companies with a long history of very consistent fundamentals, the portfolio is skewed towards companies with a DNA built around relentlessly deepening their competitive moats across cycles. More often than not, such DNA sustains over the subsequent 5-10 years too.
• Holding a portfolio of stocks for long periods of time allows the power of compounding to play out, such that the portfolio becomes dominated by the winning stocks while losing stocks keep declining to eventually become inconsequential.
• Being patient with a portfolio helps cut out ‘noise’ of trying to time entry / exit decisions. This approach also reduces transaction costs – in a portfolio with 70% churn (average churn of large cap mutual funds), 20bps broking cost and 30bps impact cost, churn reduces the terminal value of the portfolio (after 10 years) by 10% (i.e. a drag of 120bps on the 10-year CAGR). Further, reduced churn helps defer the 10% long-term capital gains tax, which enhances the terminal value of the portfolio.

Where do we add value?

The Consistent Compounders Portfolio combines our deep-dive stock-specific research with the benefits of the filter-based approach explained earlier, to help generate outperformance of 4-5% per annum over and above these filter-based portfolios. This is achieved via 3 factors:

1. Portfolio concentration: The filters might give a longer list of stocks which dilutes the reliance of the portfolio on outstanding companies. We narrow the portfolio down to 12-15 ultra-high-quality stocks.
2. Identifying the real source of strong fundamentals: Many housing finance companies, for example, cleared the filter-based criteria in 2018 or in 2019, but their fundamentals had been aided by macro factors including low-cost money market funding and a booming real estate sector, which may not sustain in the future. Hence, our research-based approach did not accept most of these housing finance companies despite their healthy historical track record.
3. Identifying one-off blips in historical fundamentals: Nestle India’s Maggi episode, for example, drove revenue growth of Nestle India below 10% in FY15. Similarly, the fall in crude oil prices to below US$30 per barrel caused a 6% product price cut by Asian Paints in FY17 which led to its revenue growth dropping below 10% YoY in FY17. Manual intervention in portfolio construction analyses the nature of these blips and on case-to-case basis we consider the inclusion of such stocks in the portfolio.

Fee Structure

Marcellus offers Consistent Compounders Portfolio with zero fixed fees The Consistent Compounders PMS comes with ZERO entry load/exit load and with no lock-in. We offer three fee structures:

* High water mark applies for performance fees Minimum investment: INR 50 lacs

Performance (as of 28th February 2022)

Source Marcellus / Bloomberg; All returns are net of fees and expenses (TWRR); Since Inception returns are annualised and all other time periods are absolute