Portfolio churn is one of the biggest problems. To avoid this, ‘Coffee Can Portfolio’ construct was created by a gentleman named Rob Kirby. At Ambit PMS, this simple idea was given an Indian touch and that was how Coffee Can PMS was born. Like the Wild West of America where Americans saved their life savings in coffee cans, this PMS strategy looks at select stocks and holds them. Forever. Let us have a close look at the PMS strategy.
Ambit’s strategy is built on the premise that most good companies in India face disruptions which could be external disruptions (regulatory changes, competition intensifying, innovation, economic growth) or internal disruptions (capital misallocation, success planning, lack of systems and processes, change in senior management by way of retirement or resignation). However, there are a handful of companies in India which have the capability to deliver earnings growth consistently in a tight band of 15%-30% each year for more than a decade, regardless of any type of disruption that they face. This forms the bedrock of the Coffee Can philosophy.
Why Coffee Can
Ambit’s Coffee Can PMS builds a portfolio of such companies which aim to deliver long term consistency of earnings growth.
Plus, the PMS strategy wants to do the following:
1. Lower drawdowns during market crash – Ambit claims on an average the percentage fall in a Coffee Can Portfolio is less than half of the broader market during a market-wide crash.
2. Low churn in the portfolio – On an average no more than 5-10% churn in a year happens in the portfolio, Ambit claims, saying that this can be compared to 40-50% churn for most mutual funds. As a result, the Coffee Can Portfolio incurs little by way of brokerage costs, capital gains taxes and expense ratios.
3. Low cost structure – There are no entry loads / exits loads / other hidden charges for any investor in this PMS strategy. Moreover, there is an option choosing zero fixed annual fees where the investor pays only a proportion of profits above a certain hurdle rate. Low watermark is applicable on the hurdle rate.
4. No need to time entry / exit from this portfolio – Given the ‘evergreen’ nature of the constituent companies, Ambit says an investor can generate healthy returns from the Coffee Can Philosophy regardless of bull / bear runs in the broader markets, regardless of whether the external economic environment is good or bad, and regardless of the number of years of since when the portfolio has been chosen by the investor.
Ambit Coffee Can PMS strategy uses two filters to narrow down its stock universe. The companies have a RoCE of more than 15% & revenue growth of more than 10% YoY for 90% of the last 10-20 years period. This brings the stock coverage to about 30 stocks out of the 4000 listed available on exchanges.
After selecting the stock, the strategy aims to hold the stocks for more than 10 years. This means it wants to hold the stock as long the company enjoys its advantages over others.
Coffee Can edge
Ambit claims that its competitive advantage is the deep understanding of organisational DNA. Next, its portfolio is a concentrated one with 10-15 stocks only. The fund manager aims to marry valuations with longevity. As a result of its process and long-term approach, the portfolio churn is less than 1 stock per year on an average.
Current portfolio details
In its latest performance update for Coffee Can PMS as on 31st August 2018, we can see the portfolio consists of 11 stocks of high-quality companies. These are spread across Financials (2 stocks), Home Building Materials (3 stocks), Consumer Discretionary (3 stocks) and Consumer Staples (3 stocks). There has been no change in the list of stock holdings (i.e., zero churn) in the portfolio since the inception of the PMS.
In the one month ended August 31, Coffee Can PMS portfolio has delivered 4.7% versus 2.9% of Nifty 50. In the last 6 months ended August 31, the portfolio has gained 29.3% versus Nifty 50’s 11.3%. In the last 12 months ended August 31, the portfolio has risen by 38.8% versus Nifty 50’s 17.8%. Since inception, the portfolio has delivered 59.7% versus 30.3% of Nifty. All returns are absolute returns net of fees and expenses. We don’t have the data for September 2018 (where the Sensex and Nifty lost close to 10%) as of now. We will update the same as we get the data.
About fund manager
Rakshit Ranjan, CFA, is the fund manager of Coffee Can PMS at Ambit Asset Management since January 2017. He has been with Ambit since 2011. Prior to joining Ambit in 2011, Rakshit spent six years covering UK equities with Lloyds Bank as Director of Research and Execution Noble as Sector Lead analyst. Rakshit holds a degree in Bachelor of Technology from IIT (Delhi).
Ambit Capital Private Limited (Ambit) is a registered Portfolio Manager with Securities and Exchange Board of India.
RupeeIQ take – We are impressed with the portfolio construct and execution of the Coffee Can portfolio. The sheer ability of walking the talk when it comes to selecting great companies, no churn and long-term holding can be easily seen in the results. No wonder, the portfolio beats the Nifty 50 by 7-8 percentage points annually. Clearly, the portfolio’s buy-and-hold-forever practices investing in the most classical sense.
Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.