By Nesil Staney
Portfolio management services provices, Marcellus Investment Managers saw its assets under management of dropped 64% – from Rs 12,700 crore to Rs 4,700 crore – in three years. Founder and chief investment officer Saurabh Mukherjea tells Nesil Staney the reasons behind the heavy erosion in its portfolio. He also speaks about the regulatory environment for PMS firms. Excerpts:
What are the best performing funds of Marcellus?
In 2022, we built a team to invest in developed markets, and it launched the Global Compounders Portfolio in October that year. The portfolio has compounded at 24.09% in the INR terms net of all fees and costs, compared with returns of 17.66% for the benchmark.
We also built a team which would apply quantitative techniques to our house philosophy of investing in clean and well-managed companies available at sensible valuations. In November 2022, that team launched the MeritorQ portfolio which has delivered 16.56%, versus 15.55% for the benchmark.
Your fund’s AUM dropped 64% – from Rs 12.7k crore to Rs 4.7k crore – in three years. Why?
Our house style of investing in high-quality companies delivered rich dividends for clients during the five years ended December 2021 as we consistently delivered absolute returns in excess of 20% and comfortably beat the benchmark. The successful run meant that by the time we were celebrating Diwali in 2021, our valuation discipline had weakened and several overvalued stocks were sitting in our portfolios. So, when the global turmoil commenced in 2022 with Russia attacking Ukraine, our portfolios were primed for a pounding. It was painful. In the 18 months running up to the summer of 2023, our portfolios corrected by 15-20% while the broader benchmarks were broadly flat. This 15-20% drop in the value of our portfolios did cost us around Rs 2,000 crore of assets. Redemptions, which followed through 2023 and 2024, cost us another Rs 4,000 crore.
At present, we look after Rs 5,100 crore of assets. Thankfully, the course correction that we made in the second half of 2022 – of not just buying high-quality companies, but doing so at sensible valuations – has helped us claw back. Over the last 12 months, Kings of Capital Portfolio and Rising Giants Portfolio have comfortably beaten the benchmark as has the Marcellus Curation Portfolio which we offer to institutional investors.
What is unique in your offerings to clients?
The last three years have seen a scorching rally in low-quality companies with dubious accounts and shady corporate governance. We work very hard in Marcellus in avoid investing in such companies even if it means sacrificing short-term gains. Secondly, we offer clients a choice of paying us zero fixed fees. They only pay us fees if our performance exceeds a pre-agreed threshold, of say 8%. Thirdly, we are the only portfolio manager in India who can offer clients globally-diversified portfolios which meaningfully reduce risk without sacrificing performance.
How are equity markets currently valued? Do you have a directional call on Nifty this year?
Valuations of small and midcap stocks are dangerously high in India. I think a 30-40% correction in small and midcaps looks all but inevitable. So, in our small-midcap portfolios, we are sitting on 40% cash. The Nifty, in contrast, looks less overvalued. In fact, within the Nifty, high-quality companies are trading at significant discounts to their long-term averages. This sort of set-up is typically what you see at the end of an extended bull market. As the bull market progresses, investors climb down the quality ladder into more and more dubious names while ignoring high-quality companies. Then, one day a bunch of low-quality names explode in a frenzy of accounting scams and investors revert back to quality.
What are your top stock picks?
Our largest positions in the Global Compounders Portfolios are some of the world’s most powerful compounding machines. What I find intriguing is that these companies are growing earnings twice as fast as the Nifty, and yet are available at valuations much cheaper than the Nifty. This is an intriguing market anomaly and one that I am seeking to profit from by allocating 40% of my personal assets.