Marcellus' Kings of Capital Portfolio (KCP)
- Clean accounts and good corporate governance
- Management teams with prudent capital allocation and conservative underwriting
- Moated and resilient business models that can not only survive through crises but also have enough strength to grow post the crisis
Understanding each of the above traits in great depth becomes crucial for analysing financial services businesses as the positive or negative impact of each of these traits has a multiplier effect on a financial services business because of the inherently leveraged nature of these companies.
Stocks Selection Process:
- Marcellus started with a universe of 95 financial stocks and ran its proprietary forensic filter on these stocks. About a third of the universe gets eliminated at this filter itself as these are companies with poor accounting quality
- Of the remaining 65 stocks, an additional 42 stocks get eliminated after applying Marcellus’ proprietary capital allocation framework. The capital allocation framework assesses whether these financial companies have been able to generate returns on equity well above cost of equity based on 6 years of their historical financial statements.
- Marcellus’ investment team does in depth research on the remaining 23 stocks. Research includes third party channel checks, corroborating management version with 3rd party channel checks, independent views on corporate governance and capital allocation, speaking to DSAs, branch managers, collection agents etc.
- The stocks which clear this final step are included in the Kings of Capital portfolio.
Why should investors invest in a financial services focused fund in the midst of a crisis when lenders are expected to report an increase in NPAs?
- KCP aims to invest not only in market leading lenders (banks & NBFCs) but also general insurers, life insurers, asset managers and brokers. These businesses have not been as impacted by Covid as the lending industry has been.
- Companies operating in the lending industry are inherently leveraged businesses, the pace of consolidation in the sector will therefore be much higher than most other sectors. In such a scenario, lenders with clean accounting, prudent capital allocation and strong balance sheets are at a distinct advantage versus their peers and are likely to gain market share post the crisis.
- High quality lenders (banks as well as NBFCs), which are Consistent Compounders, benefit significantly in the aftermath of a financial crisis. This is because: (a) when the competition struggles to raise funds during & after a crisis, great lenders have access to adequate liquidity; and (b) as competition’s ability to lend reduces, great lenders can pick and choose quality borrowers, leading to better net interest margins (NIMs), higher loan book growth, lower NPAs and hence better RoEs.
- The table below shows the performance of HDFC Ltd. And HDFC Bank during the crisis of the late 90s and the global financial crisis respectively. Both lenders reported higher NPAs and a fall in P/E ratios during the crisis, however they rapidly gained market share post the crisis and earned returns on equity which were better than pre crisis levels.
Most stocks in the Kings of capital 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:
- Allocate high allocations in the portfolio to each of the stocks
- Hold onto the portfolio despite the volatility in external environment (moratorium type situation, increasing credit costs, GDP growth rates etc)
- Make timely changes to the portfolio when required
- 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.
What is the minimum ticket size and fee structure for KCP?
The minimum ticket size for KCP is Rs. 50 lacs. Clients can choose from one of the following two fee structures:
What are the fee options for KCP?
- Option 1 (fixed fee model): 2.5% p.a. fixed fees and zero performance fees
- Option 2 (hybrid model): 1.5% p.a. fixed fees and performance fees of 15% profit share over a hurdle of 10% without catchup
There is no lock in period, entry load or exit load.
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Will Marcellus follow a model portfolio approach? Or will different clients get different list of stocks depending on when they opened their account?
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 next few days of receipt of funds