Mumbai: This was not how Saurabh Mukherjea envisaged his portfolio management service (PMS) would end up after five years: investors demanding an explanation about performance and ₹40 crore being pulled out of the PMS every day. Yet, on the fifth anniversary of his PMS, Mukherjea should be a worried man. But, is he?
Through his engaging communication style and books like Coffee Can Investing, Mukherjea had already made a big name for himself in India’s stock market by the time he launched Marcellus in 2018. Through Marcellus, Mukherjea wanted to put his much articulated philosophy into practice. The philosophy rested on buying high quality companies with fast growing earnings and firms with high corporate governance. Such companies do not come cheap, but Mukherjea argued that valuations should not deter investors. The earnings would more than compensate for the multiple. This philosophy actually worked in the first three years of Marcellus’s existence.
Then came Russia’s unexpected invasion of Ukraine. A surge in inflation around the world forced the US Federal Reserve to hike rates and the market began assigning lower multiples to Mukherjea’s fast-growing companies. “The growth has not come down. Look at the profit after tax—it grew at 20-21% compounded for the Consistent Compounders Portfolio (CCP),” Mukherjea pointed out, referring to his flagship scheme. What happened instead was a de-rating: investors simply weren’t willing to pay a lot for this growth. From a peak price-to-earnings (P-E) ratio of 54, Mukherjea’s flagship CCP has moved to a P-E of 35.
Mukherjea believes that this will change once global investors begin to redirect their flows from China to India. “Even if FPIs (foreign portfolio investors) move a small part of the $3.5 trillion they have invested in China to India (which has $500 billion of FPI stock market ownership) we will see a major rally. India has delivered them 14% CAGR (compound annual growth rate) in dollar terms over the past decade, compared to the 4% delivered by China,” he said.
What of the painful interim period of underperformance in his PMS that investors have endured? “About 70% of my investors are on the performance fee only model. I can only charge a fee if I cross a hurdle rate of 8%. If I don’t make them money, I don’t make money from them,” he added.
Mukherjea remains confident of his investment style. “There are phases when sasta (cheap) stocks do well. It does not mean I should be going out to buy them,” he said. “I have a portfolio turnover of about 15%, which means I hold on to stocks in the CCP for 7-10 years. I don’t rack up a lot of churn and transaction costs.”
What about high profile quality companies that Mukherjea has changed his mind about such as Relaxo Footware and Bajaj Finance? The former was a mistake, admitted Mukherjea. “I exited it in the CCP before its decline but kept it in ‘Rising Giants’ where the exit was done after a correction in the stock. I should have done more careful due diligence of the succession planning in the company. I’ve built that better into our process now,” he said. As for Bajaj Finance, it had run up considerably in the portfolio and the company itself has sounded a warning on unsecured loans. “I just trimmed exposure a bit there and added to HDFC Bank,” he said.
To be sure, Mukherjea’s mid cap strategy (Rising Giants) and small cap strategy (Little Champs) have also struggled in the past two years. The reason, however, is different, he argues. The drag on about 25% of portfolio companies from Chinese dumping is what has weighed down performance, he said. The companies have not made any mistakes and there’s no reason to prune them, he added. There were also external issues. Covid messed up annual reports, he said, adding that “this affected the power of our analysis.”
Despite these near-term challenges, Mukherjea takes comfort from an outperformance of his flagship portfolio, CCP, since its inception in December 2018. The CCP has recently completed five years. “I was investor No. 1 in CCP and I even persuaded my parents to sell their flat in Delhi and invest,” he said. “That decision turned out right. If you look at returns from inception, CCP has beaten its benchmark (Nifty 50) with a CAGR of about 16.1%. If investors are not convinced to stay for the longer term, I do not stop them from exiting. There is no exit load or lock in period in the CCP portfolio,” he said.
Even as Mukherjea is struggling to revive the performance of his PMS, he is facing another challenge, something he terms as bizarre. A group of operators posing as Marcellus representatives is approaching people, offering to turn their black money into white. Mukherjea has put up a notice on his website, asking people to report such instances and has lodged multiple police complaints about this activity.
Should investors continue to repose their faith in Mukherjea? Other growth-oriented fund managers such as Axis Mutual Fund have also underperformed in the past few years. Mukherjea does not stand alone in his struggles. However underperformance gets amplified in concentrated portfolios such as Mukherjea’s—the corrections are more severe here than in a mutual fund.
After May 2023, performance has revived in Marcellus strategies, making the case that they may have turned a corner. But a 2% alpha over five years may not be enough for PMS investors – this is the sort of return that is expected from mutual funds. Alpha represents how much an investment’s actual return exceeded its expected return, based on its risk level.
To get back investor faith, Mukherjea would have to come back, and that too, with a bang. As for Marcellus, it hopes to find success with a new product—global consistent compounders, a PMS strategy run from GIFT city which will invest mainly in US-based multinationals. “This product will protect Indian investors against dollar-based inflation,” Mukherjea said.
