Marcellus Consistent Compounders Portfolio (CCP)

• What is the investment philosophy of Marcellus’ Consistent Compounders PMS?

Consistent Compounders PMS defines its coverage universe (around 30 names) based on a historical track record of consistent and healthy revenue growth and ROCE (returns on capital employed). Within the coverage universe, our research approach includes digging deep into understanding the DNA of these companies which helped them deliver the historical consistency. Based on such understanding of the DNA, we buy 10-15 stocks in our model portfolio of the PMS, where we have a high degree of conviction on the company’s ability to continue delivering healthy earnings CAGR over the next decade or longer, regardless of disruptive and evolutionary changes in the interim.

• What types of companies form part of the portfolio?

The portfolio is agnostic to parameters like market cap, sectors, etc. However, given the nature of the philosophy, most constituents of the Consistent Compounders portfolio are large and liquid stocks of cash-generative companies, typically in the consumption and financial services sectors.

• What is the difference between Marcellus’ Consistent Compounders portfolio and the filter-based / robotic portfolio explained in the books Coffee Can Investing and Unusual Billionaires?

The filter-based portfolios described in these books build annual portfolio iterations using the preceding decade’s fundamentals and filtering out companies that have delivered double-digit revenue growth and returns on capital greater than the cost of capital, each year for 10 years in a row. This filter-based portfolio once left untouched for a decade, has historically delivered an average CAGR of ~25% with the volatility in this return similar to that of a Government Bond.

The Consistent Compounders Portfolio combines our deep-dive stock-specific research with the benefits of the filter-based approach explained earlier, and thereby attempts to outperform 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. So, how do we do that?
2. Ignorable consistency in historical fundamentals: Eg. Many housing finance companies which form part of the filter-based portfolios, are examples of 10 years of consistent fundamentals delivered due to unsustainable macro tailwinds for the Housing Finance Companies from low-cost money market funding and a booming real estate market in the country – neither of which to our mind is sustainable.
3. Excusable blips in historical fundamentals are forgiven: For example, Nestle’s Maggi episode ensured that the revenue growth of Nestle India dropped 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 might include such stocks in the portfolio.

• Most stocks in the Consistent Compounders portfolio are well-known names. So, what stops someone from replicating this philosophy on their own?

Theoretically speaking, it is possible and simple for a client to replicate this philosophy on his own. However, the ‘simple’ aspect of the philosophy is not ‘easy’ because if an investor doesn’t understand why he has bought a company (because he didn’t do the research on the company himself), he won’t have the conviction to do the following with his stock portfolio:

1.  Allocate high allocations in the portfolio to each of the stocks

2. Hold onto the portfolio despite the volatility in the external environment (general elections, crude prices, currency movements, GDP growth rates, etc)

3. Make timely changes to the portfolio when required – the best example was the Gruh Finance exit executed by Consistent Compounders as soon as possible, once its merger with Bandhan Bank was announced

4. Avoid diluting the benefits from the portfolio on the overall investable surplus by diversifying into too many products and hence stocks in the overall investable surplus.

5. Doesn’t a 10-15 stock portfolio, exposed to only a few sectors, end up concentrating the risk rather than keeping it diversified?

The quality of DNA which helps deliver consistent and healthy fundamentals of our portfolio companies is the biggest source of reduction in the volatility of stocks in this portfolio. Our back-testing (explained in the book ‘Coffee Can Investing’) suggests that the volatility of this portfolio is as low as that of a Government Bond for holding periods longer than 3 years.

• What is the average churn in the portfolio in a year?

Historically, there has been no more than 5-8% annual churn on average under this philosophy.

• How do you time entry and exit from the portfolio? Do you take cash calls?

We do not believe we can time either market movements or share price movements. Moreover, the share prices of the kinds of companies that we hold in our portfolios, have had a very low correlation with the broader market movements. The beauty of the Consistent Compounders portfolio is that since the average annual earnings growth of the portfolio is likely to remain healthy regardless of changes in the external environment, short and long-term P/E movement is not a significant contributor in helping our clients compound their portfolios at a healthy rate. Please refer to our 1st March 2019 newsletter on this subject.

• It is perceived that small caps grow faster than large caps. Then why has this portfolio delivered 20-25% annualized returns historically despite a large-cap bias?

On a relative basis, it is true that a champion small-cap stock is likely to grow faster than a champion large-cap stock. However, on an absolute basis, it is not true that champion large-cap stocks grow at less than 15%. In fact, firms like HDFC Bank and Asian Paints have demonstrated that no matter how small or how large were these companies, their revenue and earnings growth rates have always remained in the range of 20%-30% CAGR.

• Will Marcellus follow a model portfolio approach? Or will different clients get different list of stocks depending on when they opened their accounts?

We will follow the model portfolio approach.

• Will funds be deployed into the model portfolio immediately? Or will you take cash calls to time the entry points?

We will endeavour to deploy the funds over the next few days of receipt of funds.

• What is the minimum ticket size and fee structure for CCP?

The minimum ticket size for CCP is Rs. 50 lacs.

• What are the Fee structures available in CCP Portfolio?

Clients can choose any of the following fee structures:

Direct:

Partner:

Fee Calculator:

Direct:

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Partner:

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Exit load:

For investments in Consistent Compounders Portfolio (CCP), there is no lock-in period or exit load. Investors can close their accounts anytime without any exit load charges.