Marcellus’ financial sector PMS, The Kings of Capital, to build a portfolio of 10 to 14 companies; can it ride the volatility?

The Kings of Capital portfolio will consist of lenders, as well as non-lenders, which are expected to reduce volatility in the portfolio

Kumar Shankar Roy Jul 30, 2020

Financial sectorPortfolio management services (PMS) company Marcellus Investment Managers has announced the launch of its third product – a financial services focused strategy called The Kings of Capital.

The key objective of the strategy  — whose stock selection tenet is similar to Marcellus’ Consistent Compounders (multicap) and Little Champs (smallcap) funds — is to own a multi-cap portfolio of 10 to 14 high-quality financial companies (banks, NBFCs, life insurers, general insurers, asset managers, brokers) that have good corporate governance, prudent capital allocation and high barriers to entry.

There are not too many financial sector funds in the PMS landscape, with Trivantage Capital Resurgent Financials Equity and Kotak Fintech being the only two other prominent strategies.

Let us take a detailed look at Marcellus’ offering.

Why financials

It is common knowledge that investing in financial stocks during a crisis delivers not only outsized returns in relative terms but also in absolute terms. For example, if you had invested in the Bank Nifty when it bottomed out during the Lehman crisis (on 9th March, 2009), your five-year compounded return would have been 28%. Even if you had invested three months prior to the bottom, your five-year return would still have been a very respectable 21%.

As per Marcellus, the reason that this happens is that investors enjoy the following tailwinds by investing in high-quality financial services stocks during a crisis:

* Acceleration of growth of high-quality lenders due to market share gains post the crisis (as the weaker lenders fade away);

* Normalisation of NPAs (Non-Performing Assets) and system-level credit growth once the crisis ends; and

* Normalisation of P/E multiples as economic growth, credit growth, and NPAs normalize.

Why now

Marcellus believes that the foundations of India’s economic and financial recovery are in place.

According to data, four times in the last 40 years, a US recession alongside falling US bond yields and falling oil prices has been followed by a strong economic recovery in India. In fact, India has never witnessed an economic recovery without a US recession preceding it!

“Now, all three conditions for an Indian economic recovery – a US recession, smashed crude prices and falling US Government bond yields are – in place. The Kings of Capital portfolio is a leveraged play on the Indian economy and hence should benefit the most from the economic recovery in India,” Marcellus says.

What to buy

The key objective of the Kings of Capital PMS strategy will be to own a portfolio of 10 to 14 high-quality financial companies (banks, NBFCs, life insurers, general insurers, asset managers, brokers) that have good corporate governance, prudent capital allocation and high barriers to entry.

The aim is to buy good quality banks and NBFCs which can manoeuver through economic and financial cycles with a razor-sharp focus on capital allocation, execution, and underwriting. These premier banks and NBFCs do not get swayed by the common emotions of greed and fear and this is the primary reason for their market-leading position.

Marcellus Kings of Finance

Marcellus approach

Every asset manager wants to buy great quality stocks and hold them for the long-term. There is a lot of marketing that is done. And, we should not blame anybody. A seller will try to sell their products.

So, what is different about the Marcellus approach? The edge seems to be Marcellus’ intense focus on accounting quality and corporate governance. This can avoid extreme downfalls. Financial companies are leveraged businesses and hence the impact of poor accounting quality is magnified.

Plus, self-discipline is important. Marcellus plans to sell when:

• The next raging economic boom is upon us – usually 3 to 4 years after a crisis

• Banks and NBFCs start raising money through IPOs and QIPs again

• NBFCs start borrowing from the CP market on a large scale and poor-quality banks and NBFCs start growing rapidly

Sector funds can be highly volatile

The Kings of Capital portfolio will consist of lenders as well as non-lenders. Marcellus believes the non-lenders in the portfolio not only give sustainable growth because of the large structural opportunity that they can capture over the next decade and also reduce the volatility in the portfolio.

According to Marcellus, the non-lending part of the portfolio adds resilience to the portfolio during times of stress because insurers have a lower beta than lending businesses while asset management and brokerage businesses do not take any balance sheet risk.

We agree partly with Marcellus’ theory on volatility. Sector focussed funds in the mutual funds’ space have shown high levels of volatility. Financial sector stocks are not immune to volatility. One may claim to construct a portfolio that will show lower volatility, but the proof of the pudding is in the eating. Historical data shows that one-sector plays are far more volatile than diversified portfolios.

Fund structure

Marcellus says it is offering the Financials Reset Fund in a PMS construct with zero entry/ exit load and with no lock-in.

Clients can choose one of the following two fee structures:

• 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

High watermark applies for performance fees

The minimum investment in the strategy is Rs 50 lakh.

RupeeIQ take

The main question that PMS investors have to answer about this product is whether they would want focussed exposure to financial stocks. Most multicap portfolios in the industry already have a considerable allocation to financial stocks if you combine banks, NBFCs, insurers, brokers, etc.

If you are a new PMS investor, you simply do not need a single-sector focus. If you are an experienced PMS investor with an appetite for the thrill, you can go for it but try to keep sector focussed fund within a 5-10% band of your overall portfolio.

Another factor to be mindful of in the case of Marcellus’ Kings of Capital strategy is the potential higher risk from the 10-14 stock portfolio. While it is given that PMSes are concentrated plays, the two risks – single sector and a 10-14 stock portfolio – up the overall risks in our view. Marcellus has stated that it will buy low-risk financial stocks to cut volatility. That sounds good in theory, but we will wait to see how that plays out in practice.

Marcellus has proved itself as a worthy asset manager if you look at its Consistent Compounder strategy. Even, its newly-launched Little Champs portfolio has done well given its limited track-record. So, the stock selection and portfolio management credentials are good. If the Kings of Capital strategy can walk the talk, that will add a new feather to its cap.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

Subscribe to our newsletter

Envolpe image

Want to grow your money?

Subscribe & keep learning!

 ⓘ Find the best performing mutual funds Explore


Mohammed Haseeb