Consistent Compounders objective is to invest in a concentrated portfolio of heavily moated companies that can drive healthy earnings growth over long periods of time.
It identifies firms with high pricing power that helps sustain a wide gap between returns on capital employed and cost of equity. The portfolio aims to hold such firms for 8-10 years on average where healthy returns are generated with volatility like that of a government bond. Portfolio Construction involves a two-stage process:
1) Filter based approach to create an investible universe of 30-35 stocks
2) In-depth bottom-up research of such companies in the universe to assess sustainable competitive moats to build a portfolio of 10-20 stocks that deliver healthy compounded earnings growth over long periods of time.
Corporate Governance:- The foremost step to building an investment portfolio is to identify and staying away from companies which are not clean in terms of accounting . This is the universe of companies that is studied for investing.
Consistent Compounders:- Being clean in accounting doesn’t mean that company has a potential to compound investors’ wealth. So, how do you find such companies that are not only clean, but also compound wealth. Amongst world’s large economies, India is the only economy where one can find in sector after sector, either one or at most two companies accounting for maximum profit share of that sector”
• Paints – Asian Paints and Berger Paints
• Cigarettes – ITC
• Baby Milk Power – Nestle
• Cooking oil – Marico’s Saffola & Adani’s Wilmar Brand
• Adhesives – Pidilite’s Fevicol brand
• Trucks – Ashok Leyland and Tata Motors
Likewise there are approx. 25 such companies which are not only clean, but that dominate the essential product market with each player being a leader in its product category. For a large country like India, a company dominating product category for 20-30 years, means, company would be generating large cash flow, so much that company can be called ‘a money making machine’. For these companies decade after decade, average annualized return on capital employed (ROCE = Profits/Total Capital Employed ), ranges between 30% – 100% p a.
You won’t find so high ROCE numbers in companies of large economies. Take examples of Toyota, Daimler Chrysler, JP Morgan, Morgan Stanley, Walmart, Accenture, Royale Dutch Shell, think of all key global companies you can think of, and you will find at max ROC of 15%.
IF YOU AND I CAN SEE THESE COMPANIES GENERATING SO HIGH ROC, WHY CAN’T OTHER COMPETITORS COME CHASING TO TAKE A SHARE FROM THIS HUGE PIE, LIKE WE HAVE SEEN RELIANCE JIO TAKING AWAY VODAFONE AND BHARTI’S PROFITS ???
In case of these companies, strong entry barriers protect them, and make it extremely difficult for competition to cut their profit pie. These companies over years have created competitive moats, which are difficult to break overnight. These companies actually approached the most challenging aspect in the sector; rather than resolving the challenge in a simple, straight forward manner, these companies have thrown a few disruptions on the construct of the sector and have actually made challenge harder for everybody to operate in. Solution to the problem being the strong forte of these companies, provide them strong ‘business moat’, which is not easy to replicate for others.
If a concentrated equity portfolio of 10-12 such names with very high ROC, is created, it can potentially deliver returns significantly higher than NIFTY with underlying volatility half of NIFTY. So, if you want to compound wealth without getting sleepless nights, look for such consistent compounders. Since, earnings and return on capital of these companies is so huge and consistent, these companies enjoy high P/E and should continue to do so
A well-researched, and concentrated portfolio of these companies is “A low risk route to Stupendous wealth creation” Marcellus Investment Managers follows this approach and offers a low cost, a low risk portfolio of clean, well run companies that deal in essential products and enjoy monopoly in their product category. This PMS Product is named as Consistent compounders. ZERO Entry load, ZERO Exit load, ZERO Fixed fee, and only 1 Paisa of custody fee.
We at PMS AIF World recognise this product as one of the right Investment products for informed investors.