Marcellus Consistent Compounders Portfolio (Marcellus CCP PMS)

The Objective of Marcellus Consistent Compounders PMS is to invest in a concentrated portfolio of heavily moated businesses, that can drive healthy earnings growth over long periods of time.

Marcellus’ Consistent Compounders PMS is a quality portfolio that identifies firms with high pricing power that helps sustain a wide gap between returns on capital employed and cost of equity. The portfolio aims to hold such heavily moated and sustainably competitive companies for 8-10 years on an average where healthy returns are generated with volatility like that of a government bond.

The experienced investment team at Marcellus Investment Managers through in-depth primary research, uses quantitative frameworks which use a combination of forensic accounting and capital allocation assessment and shortlist companies with superior track record of capital allocation, that generate free cash flows. The idea is to hold these companies for long periods of time with little or no churn

The Portfolio Construction at Marcellus Investment Managers involves a two-stage process:

• Filter based approach to create an investible universe of 25-30 stocks

• 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.

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.

The filter-based approach is to 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, build a portfolio of such stocks and hold them patiently for long periods of time, with very little churn.

At Marcellus, the Purpose is to make wealth creation simple and accessible by being trustworthy and transparent capital allocators.

The investment philosophy at Marcellus has evolved from the ideas of Kirby and Thiel, which they have refined further.

The investing approach has 3 pillars:

Clean Accounts: They have quantitative frameworks which use a combination of forensic accounting and capital allocation assessment define our investible universe.

Capital Allocation: They look for companies with superior track record of capital allocation – companies that generate free cash flows and reinvest them in the business to fuel further growth.

Competitive Advantage: The experienced investment team through in-depth primary research, constructs a portfolio of companies with deep competitive moats.

These companies are then held on for long periods of time with little or no churn, which allows them to capture the benefits of long-term compounding and deliver superior returns.

Corporate Governance:- The foremost step to building an investment portfolio is to identify and staying away from  companies which are not clean in terms of accounting . This is the universe of companies that is studied for investing.

Consistent Compounders:- Being clean in accounting doesn’t mean that company has a potential to compound investors’ wealth. So, how do you find such companies that are not only clean, but also compound wealth. Amongst world’s large economies, India is the only economy where one can find in sector after sector, either one or at most two companies accounting for maximum profit share of that sector”

MANY EXAMPLES:-

• Paints – Asian Paints and Berger Paints
• Cigarettes – ITC
• Baby Milk Power – Nestle
• Cooking oil – Marico’s Saffola & Adani’s Wilmar Brand
• Adhesives – Pidilite’s Fevicol brand
• Trucks – Ashok Leyland and Tata Motors

Likewise there are approx. 25 such companies which are not only clean, but that dominate the essential product market with each player being a leader in its product category. For a large country like India, a company dominating product category for 20-30 years, means, company would be generating large cash flow, so much that company can be called ‘a money making machine’. For these companies decade after decade, average annualized return on capital employed (ROCE = Profits/Total Capital Employed ), ranges between 30% – 100% p a.

You won’t find so high ROCE numbers in companies of large economies. Take examples of Toyota, Daimler Chrysler, JP Morgan, Morgan Stanley, Walmart, Accenture, Royale Dutch Shell, think of all key global companies you can think of, and you will find at max ROC of 15%.

The Consistent Compounders Portfolio combines the 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:

Portfolio concentration: The filters might give a longer list of stocks which dilutes the reliance of the portfolio on outstanding companies. The team narrows the portfolio down to 12-15 ultra-high-quality stocks.

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, the research-based approach did not accept most of these housing finance companies despite their healthy historical track record.

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 consider the inclusion of such stocks in the portfolio.

INTERESTING & INSIGHTFUL QUESTION THAT IS FREQUENTLY ASKED BY MARCELLUS CCP INVESTORS?

If you and i can see these companies generating so high return on capital employed, why can’t other competitors in their respective industries come chasing to take a share from them. like we have seen reliance jio taking away vodafone and bharti’s profits.

Is this risk not there in the marcellus underlying companies like hdfc bank, pidilite, asian paints, dr lal path labs, tcs, nestle, titan, abbott etc ??

Answer : firstly, marcellus ccp companies have created strong entry barriers for their competitors through their brand equity and through the business execution strategies followed repeatedly. this make it extremely difficult for competition to hurt market share or margins for these businesses. secondly, these companies over years have created competitive moats, which are difficult to break easily. these companies actually approached the most challenging aspect in the respective sector; rather than resolving the challenge in a simple, straight forward manner, these companies have thrown disruptions on the construct of the sector and have actually made challenge harder for everybody to operate in. solution to the problem being the strong forte of these companies, provide them strong ‘business moat’, which is not easy to replicate for others.

If a concentrated equity portfolio of 12-15 such companies with very high roce, is created, it can potentially deliver returns significantly higher than nifty with underlying volatility half of nifty. so, if you want to compound wealth without getting sleepless nights, look for such consistent compounders. since, earnings and return on capital of these companies is so huge and consistent, these companies enjoy high p/e and should continue to do so.

A well-researched, and concentrated portfolio of these companies is “a low risk route to stupendous wealth creation” marcellus investment managers follows this approach and offers a low cost, a low risk portfolio of clean, well run companies that deal in essential products and enjoy monopoly in their product category. this is reason marcellus pms product is named as consistent compounders portfolio.

Marcellus ccp pms comes with all flexibilities like zero entry load, zero exit load, zero fixed fee, and only one paise of custody fee.

We at pms aif world recognise marcellus ccp pms as one of the right investment products for consistent wealth creation by informed investors.

• In 2021, Marcellus’ Consistent Compounders Portfolio or Marcellus CCP was awarded Rank #2 as the Best Newcomer PMS across all categories, on a 2Y Absolute Returns Basis. These Awards were hosted by PMS AIF WORLD, in association with IIM-Ahmedabad.

• In 2021, Marcellus’ Little Champs Portfolio or Marcellus LCP was awarded Rank #2 as the Best Newcomer PMS across all categories, on a 1Y Absolute Returns Basis. These Awards were hosted by PMS AIF WORLD, in association with IIM-Ahmedabad.