CONSISTENT COMPOUNDERS

A PMS OFFERING BY
MARCELLUS INVESTMENT MANAGERS

Private & Confidential. 1

 Private & Confidential.

CONTENTS
3. An alternative recipe for investing in India comes from California
4. Consistent Compounders PMS – The Strategy
5. Filter based approach
6. The power of a filter based approach
7. How do we (as fund managers) add value?
8. The team
10. Fee Structure
11. 2 books which will give you more information

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AN ALTERNATIVE RECIPE FOR INVESTING IN INDIA COMES Private & Confidential.

FROM CALIFORNIA
 Rob Kirby, in a note written in 1984 (in the Journal of Portfolio
Management), narrated an incident involving his client’s husband.
The gentleman had purchased stocks recommended by Kirby in
denominations of US$5000 each but, unlike Kirby, did not sell
anything from the portfolio. This process (of buying when Kirby
bought but not selling thereafter) led to enormous wealth
creation over a period of about ten years.
 The wealth creation was mainly on account of one position
transforming to a holding worth nearly $1m in Xerox. Impressed
the power of this approach - of buying great companies and then
letting them for ten years - Kirby coined the term “Coffee Can
Portfolio”.
 Nearly 40 years later, Peter Thiel hit Power Law: 2 firms generate
exponential returns at the end of 10 yrs
upon the same insight but this time in
the context of the VC investing – great 100

Investment returns
VC portfolios are defined by a couple of 80
blazing winners at the end of ten years.

(x times)
60
Thiel calls this the “Power Law”.
40

20

0
1 11 21 31 41
Number of firms
Source: Peter Thiel’s ‘Zero to One’ . 3
MARCELLUS’ CONSISTENT COMPOUNDERS – THE STRATEGY
Marcellus Investment Managers in December 2018 launched a PMS strategy – Consistent
Compounders to invest 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 30-35 stocks
2) in-depth bottom-up research of such companies in the universe to assess sustainable
competitive moats
to build a portfolio of 10-20 stocks that deliver healthy compounded earnings growth over long
periods of time.
Such a portfolio is monitored for sustainability of moats on a continuous basis through extensive
primary research
Repeating the filters annually helps keep the investible universe updated and also such a universe
is continuously researched for developing or strengthening of moats to augment the portfolio

Private & Confidential.

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THE FILTER BASED APPROACH
We create a list of stocks using a twin-filter 2008-18

criteria of double digit YoY revenue growth and 2007-17

2006-16
return on capital being in excess of cost of
2005-15
capital, each year for 10 years in a row. 2004-14

2003-13
Next, we build a portfolio of such stocks each 2002-12

year and hold each of these annual iterations 2001-11

of portfolios for the subsequent 10 years 2000-10

0% 5% 10% 15% 20% 25% 30% 35%

(without any churn).
Sensex returns CAGR Consistent Compounders returns CAGR

The bar chart on the right shows the Source: Bloomberg. Note: Only the Consistent Compounder Portfolios
which have finished their 10 year run have been shown. Note: These
backtesting performance of such a filter based are total shareholder returns.
portfolio.
There are two conclusions from this exercise:
• This filter based portfolio delivers returns of 20-30% p.a. and 8-12% outperformance relative
to the Sensex.
• The volatility of returns of such portfolios, for holding periods longer than 3 years, is similar
to that of a Government Bond
Returns here (both for our portfolio and for the Sensex) are on a Total Shareholder Return basis
i.e. all dividends are included in the returns.
Private & Confidential.
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 THE POWER OF A FILTER BASED APPROACH

Unique DNA of these companies: By “filtering in” companies with a history of very
consistent fundamentals over very long time periods, the portfolio is skewed towards
companies with a DNA built around relentlessly deepening their competitive moats
despite disruptive changes taking place both inside as well as outside the organization.
More often than not, such DNA sustains over the subsequent 5-10 years investment
horizon of the filter based approach.

Power of compounding: Holding a portfolio of stocks untouched for 10 years 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.

Avoiding the pitfalls of psychology and reducing transaction costs: Being patient with a
portfolio helps cut out ‘noise’ of trying to time entry / exit decisions. With no churn, this
filter based approach also reduces transaction costs. Consider two data points: (a) 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); and (b) deferring the 10% long term
capital gains tax payable on the portfolio by 10 years enhances the terminal value of the
portfolio by 8% (i.e. 100bps increase in the 10-year CAGR) vs a portfolio where capital
gains are paid each year.
Private & Confidential.
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 Private & Confidential.

SO HOW DO WE (AS FUND MANAGERS) 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 stock 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 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.

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 Private & Confidential.

MARCELLUS – THE TEAM

Saurabh Mukherjea, CFA – Chief Investment Officer
Saurabh is the former CEO of Ambit Capital and played a key role in Ambit’s rise as a broker and a wealth
manager. When Saurabh left Ambit in June 2018, assets under advisory were $800mn.
Saurabh has written three bestselling books: Gurus of Chaos (2014), The Unusual Billionaires (2016) and
“Coffee Can Investing: The low risk route to stupendous returns” (2018).
Prior to turning around Ambit, Saurabh was a co-founder of Clear Capital, a London based small-cap equity
research firm which he and his co-founders created in 2003 and sold in 2008.
Qualifications Saurabh is a CFA charter holder with a BSc in Economics (with First Class Honours) from the
London School of Economics. He also has a MSc in Economics (with distinction in Macroeconomics &
Microeconomics) from the same institution. In 2018, upon SEBI’s invitation, Saurabh joined SEBI’s Asset
Management Advisory Committee.

Pramod Gubbi, CFA, Head of Sales

In the final two years of his 8 year stint in Ambit Capital, Pramod was Managing Director & Head of
Institutional Equities (from 2016 to 2018). Prior to that Pramod, served as the head of Ambit’s Singapore
office from 2013-2016. Before joining Ambit, Pramod worked across sales and research functions at Clear
Capital, a British equity research firm. Besides being a technology analyst, Pramod has served in technology
firms such as HCL Technologies and Philips Semiconductors’ Indian arm in Business Development and
Engineering respectively.
Qualifications: Pramod is CFA charter holder with a B.Tech from Regional Engineering College, Surathkal and
a Post-graduate Diploma in Management from the Indian Institute of Management – Ahmedabad.
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 Private & Confidential.

MARCELLUS – THE TEAM

Rakshit Ranjan, CFA – Portfolio Manager

Rakshit spent 6 years (2005-2011) covering UK equities with Lloyds Bank (Director, Institutional Equity
Research) and Execution Noble (Sector Lead analyst). During these six years, he was ranked amongst the top-
3 UK Insurance analysts (Thomson Reuters Extel survey) in the mid-cap space. Since 2011, Rakshit led Ambit
Capital's consumer research franchise which got voted as No.1 for Discretionary Consumer and within top-3
for Consumer Staples in 2015 and 2016. He launched Ambit's Coffee Can PMS in Mar'17 and managed it till
Dec'18. Under his management, Ambit's Coffee Can PMS was one of India's top performing equity products
during 2018.
Qualifications: Rakshit has a B.Tech from IIT (Delhi) and is a CFA charter holder.

Sudhanshu Nahta, Analyst

Prior to joining Marcellus, Sudhanshu was Executive Assistant to the CEO at Ambit Capital and worked in the
Institutional Equities’ Strategy team. He has also worked with KPMG in the statutory audit team from 2013
to 2016 gaining extensive experience across Indian accounting standards, financial control systems and
financial statement analysis & reviews.
Qualifications: Sudhanshu is a qualified Chartered Accountant and a CFA Level 2 candidate. He has
completed his graduation in Commerce from Mumbai University.

Note: Marcellus continues to grow its team with 3 more additions to its investment team in Q1 2019 and is
supported by team of 6 in operations
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 Private & Confidential.

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. Our
clients can choose any of the following fee structures:

1. a fixed fees model (2% p.a. fixed fees + zero performance fees) or
2. a variable fees model (zero fixed fees + performance fees of 20% profit share above a hurdle of
8%, no catch-up)*
3. a hybrid model (1% p.a. fixed fees + performance fees of 15% profit share above a hurdle of 12%,
no catch-up).

High water mark applies for performance fees

*Hurdle of 10% applicable for accounts opened on or before 31st March 2019

Minimum investment: INR 25 lacs

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BESTSELLING BOOKS WHICH WILL GIVE YOU MORE Private & Confidential.

INFORMATION

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