Saurabh Mukherjea reaffirms faith in his investment strategy amid rough patch

This portfolio which primarily invests in 15-20 mid-cap companies delivered negative 15% return as of October 2022 since its inception in December 2021. This is against about 7% return generated by the benchmark during the same period. Even the Nifty Mid-cap 150 Index TRI reported about 6% return in the given period.

Though less than one-year is a short span of time to evaluate the performance of any equity fund, the expectation on the PMS house, founded by Saurabh Mukherjea (popularly known for his coffee can style of investing), to deliver higher returns over benchmark across all timeframes, made critics take note of the severe underperformance.

Marcellus has been struggling with the performance in the last one to two years across all schemes. The PMS house, in its newsletter released on November 15, 2022, made a passing comment that the resilient companies (entities with high return on capital, high incremental margin) that the scheme invests in are “less optimised on maximising short-term returns”. It further added that those companies are more focused on their ability to adapt and evolve to changing conditions, surviving and even capitalising upon extreme events.

In an interview with Mint, Mukherjea said, “we understood the risks that war between Russia and Ukraine posed to us (portfolio). But our view has been that the war and high interest rate scenario is not going to be a permanent state of affair. Thus, we stayed invested across our portfolios in the same style of investing.”

Here, we look at the investment strategy of the Rising Giant’s portfolio as highlighted in their newsletter. The fund divided the portfolio into two components, which it calls as – resilience and optionality.

Two categories

Resilient companies are defined as those that generally high return on capital, high incremental margin, recurring revenue, cash generative businesses.

These companies are designed to be core part of the portfolio with holdings such as Astral, a plastics pipe company, GMM Pfaudler that supplies chemical process equipment, Aavas in the lending business of the affordable housig segment, Info Edge’s with Naukri.com as its vertical and Dr Lal PathLabs, a healthcare company. The PMS house believes that these companies have strong moats which would be very challenging for competitors to replicate.

When it comes to ‘optionality’ investments, the scheme refers to high growth net cash businesses which can deliver higher returns with minimum investment. As per the newsletter, this category of companies decentralized responsibilities with strong and focused business heads to scale up new business initiatives.

The newsletter also quoted a few examples such as Suprajit Engineering with N S Mohan as the MD and Group CEO responsible for all the operational matters including the subsidiaries.

“Cholamandalam Investment and Finance Co has added three new product categories including SME loans, consumer & business loans – with separate heads to run each vertical independently while the group’s senior management looks at overall strategy and capital allocation decisions,” the newsletter further added.

Maximum drawdown

On asking the acceptable drawdown by a fund manager in extreme scenarios, Mukherjea added – “during the Lehman drawdown starting January through to November 2008, the drawdown was 55-60% for many large cap Indian mutual funds which were there for around 10 years at that point. Should they have wound up after having suffered a drawdown? I’m glad that they didn’t because it proved to be a temporary period. Within one and a half years, they were back to square one. Similarly, if we look at January to March 2020, the Indian market fell 35%. Even then, you will find several large cap mutual funds fell 30 to 40%. Those mutual funds have been around for 20-25 years. Should they have dropped out of contention in March 2020? I don’t think so. I don’t think fund managers should lose sleep when events like COVID create drawdown. In fact, the skill of a fund manager is to buy heavily in the drawdown. The skill of this job is buying more when the stock is coming off, rather than getting very emotional about drawdowns. We get paid to stay rational when other people are getting emotional.”

Give time

According to Santosh Joseph, founder of ‘Refolio Investments’ that offers distribution of Portfolio Management Services, investors in this scheme need not worry looking at the short-term performance of the fund. He believes that the fund is best placed to take advantage of the growth opportunities in India.

“The Marcellus Rising Giant story is essentially a nicely packaged midcap strategy with big bet on India and the next generation of leaders in the stock markets and potential multi baggers. The Rising Giants strategy will probably need time to fructify. Existing investors need not worry or panic. When you have fundamentals in order, the stock price action could be delayed but you will reap the benefits in the long-run,” Joseph added.