Saurabh Mukerjea’ PMS firm Marcellus Investment Managers made waves with its Consistent Compounders and Little Champs strategies. But, its 3rd offering – Kings of Capital (KCP) – has not created alpha. KCP is a financials sector focussed investment strategy with a portfolio of banks, NBFCs, life and general insurers, asset managers and brokers. Since its inception about fifteen months ago, the KCP strategy has under-performed Bank Nifty by 20 percentage points. Here, we take a detailed look at the KCP strategy.
PMS construct
The three tenets for selecting stocks in Kings of Capital remain the same as the other two strategies – Consistent Compounders and Little Champs: Clean accounting and good corporate governance; Historical evidence of prudent capital allocation; and High barriers to entry so that companies are able to sustainably generate return on capital higher than cost of capital.
Marcellus KCP created a portfolio of high-quality lenders, general insurers, life insurers, asset managers and brokers. The portfolio was launched on July 28, 2020.
Performance
Since inception (to Oct 31, 2021), KCP has given 32.8% gain versus Bank Nifty TRI’s 57.6% return. In the last 6 month period, KCP generated 15.1% vis a vis 19.7% of Bank Nifty.
In the last 1 year, KCP has given 40.86% versus 61.9% of ASK Investment Managers Financial Opportunities, 63.27% of Kotak Fintech and 58.61% of Trivantage Capital Management Resurgent Financial Equity. This shows clearly that Marcellus KCP has under-performed both Bank Nifty and PMS peers.
While the lenders in the KCP portfolio i.e. banks + NBFCs have delivered good returns since inception, the non-lenders in KCP have delivered lower return leading to a lower blended return and relative underperformance vs. the Bank Nifty.
Also, do note that since KCP uses capital allocation filters to zero in on Financial Services companies which have historically demonstrated the ability to deploy capital prudently, it has missed out on some turnarounds in the Financial Services sector. Of course, missing them does also mean avoiding perfect entry and exit into such stocks.
You can read a note by Marcellus on KCP under-performance here.
Our take
Without going into the finer details, the truth is no PMS or any fund manager can always deliver alpha. Strategies will have to go through ups and downs. Marcellus had made a name with Consistent Compounders (largecap bias) and now with Little Champs (smallcap bias). KCP is a sectoral/thematic play on financials, and as such a more different & difficult challenge.
Unless you have reasons to disagree with KCP investment philosophy and portfolio, there is no need to be unduly worried. We would advise you to wait and watch KCP performance for another year before taking a firm call.
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