The PMS will use forensic accounting to weed out suspect companies; will maintain a 15 stock portfolio with low churn
Smallcaps are being marketed as an attractive opportunity for those patient enough for next four to five years. Cheap valuations and an expected turnaround in the sentiment towards smallcaps have been highlighted as major factors behind the anticipated upturn in smallcaps, which as a group have underperformed largecaps by a wide margin in last two year period.
It is one thing to say smallcaps are attractive, but building a smallcap portfolio that will stand the test of time is no walk in the park. When investment firms that have a great track record in terms of stock picking launch smallcap strategies, one tends to give more attention. Marcellus, which has already delivered chart-topping 27% returns among all PMS strategies in last one year period, has come out with ‘Little Champs’. RupeeIQ takes a closer look. Read on.
Entry and exit in smallcaps is very important. A small miss and a large part of gains could be lost. Each year 60 companies enter the BSE500 index. From an investors’ viewpoint, in the three-year run-up to entering the BSE500, new entrants outperform the index by a CAGR of 40%, indicating significant return opportunity before these stocks are discovered by institutional investors.
However, at the same time, high promoter-dependency, smaller size, a propensity for accounting mischief and relatively shorter operating history requires much higher degree of research rigour and diligence from investors, Marcellus argues.
Hence, the key objective of Marcellus’ small cap “Little Champs” portfolio is to own a portfolio of about 15 sector leading franchises with stellar track records of capital allocation, clean accounts and high growth potential.
The PMS firm expects its robust in-house forensic and capital allocation frameworks together with its team’s experience in forensic accounting and vast network of primary data sources to help it achieve the portfolio objective.
The three common stories across these champion small caps which have grown from near obscurity to prominence over the last decade have been:
(i) Businesses that were earlier local in nature, became regional and finally gained national presence. Think of Kajaria Ceramics and La Opala.
(ii) Businesses that were successful in replicating their leadership in one category across multiple categories. Think of Supreme Industries, Astral Poly.
(iii) Businesses that were able to successfully capture a significant part of the global pie. Picture Vinati Organics, AIA Engineering and Garware Technical Fibres.
These stock names are given as examples.
The Little Champs strategy will use the capital allocation framework that helps it to identify companies which demonstrate ability to grow efficiently, generate cash and redeploy them to further grow – in essence, a self-sustaining cash machine.
The strategy wants to be particularly sure of staying away from dubious names where they are not convinced about the cleanliness of the accounts or the integrity of the promoters (even though business potential may sound promising). This is because the fruits of such a company’s performance may not get shared with minority shareholders.
The smallcap strategy intends to keep the portfolio churn low (not more than 25-30%) to reap the benefits of compounding as well as minimise the impact of trading costs.
Continuous monitoring and evaluation will also be key, even though Marcellus does not put much weightage on short-term factors like weak quarterly earnings. What it will watch out for is important structural change in the company like key management change, noteworthy capital allocation decisions or crucial corporate governance.
Saurabh Mukherjea is the CIO of Marcellus Investment Managers. Rakshit Ranjan is a Portfolio Manager at Marcellus Investment Managers.
The Little Champs portfolio as on January 16, 2020, had a total of 14 stocks with equity allocation of close to 88%. While its stock selection is purely bottom-focussed, no single sector constitutes >20% of invested corpus.
The Little Champs portfolio went live on August 28, 2019. Since inception, it has gained over 19% and beat BSE Smallcap. Thats a small period to assess returns but worth mentioning.
In existing mid and smallcap strategies in the PMS universe, Stallion – Core Asset Fund, Ambit Good and Clean, and Centrum Deep Value are chart toppers in the last one year period.
In the since inception time period, AccuraCap Picopower, Care PMS Growth Plus Value, Invesco India Caterpillar, and Sundaram S.E.L.F are worth mentioning.
Marcellus offers the Little Champs strategy in a PMS construct.
Fixed fees are 1.5% per annum (charged quarterly).
Performance fees are 20% profit share above a 10% hurdle. Performance fees charged on cumulative gains at the third anniversary. Performance fees will be charged without catch-up i.e. the first 10% return per annum (net of fixed fees) will be not be subject to performance fees. High water mark applies for performance fees.
If redeemed prior to the completion of three years, performance fees will be charged as on redemption date.
Exit load is structured as 3%, 2% and 1% if redeemed in the first, second and third year respectively.
Minimum investment is Rs 1 crore. Investors in Marcellus’ Consistent Compounders strategy can avail this strategy as long as the overall corpus with Marcellus exceeds Rs 1 crore and a minimum of Rs 50 lakh is invested in Little Champs.
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