How Kings of Capital Beats the Benchmark with Boring, Well-Managed Companies

Our Financial Services Portfolio has beaten the benchmark over the past 1, 2 and 3 years. Now as the interest rate cycle turns upwards, the odds are high that Kings of Capital will outperform by an even greater margin. To invest with us in KCP, click on kcp.marcellus.in

Source: Marcellus Investment Managers; Marcellus Performance Data shown is till 31st Aug 2026 and is net of fixed fees and expenses charged till latest quarter and is net of Performance fees charged for client accounts, whose account anniversary / performance calculation date falls upto the last date of this performance period; since inception & 3 years returns are annualized; other time period returns are absolute.
For relative performance of particular Investment Approach to other Portfolio Managers within the selected strategy, please refer https://www.apmiindia.org/apmi/welcomeiaperformance.htm?action=PMSmenu , Under PMS Provider Name please select Marcellus Investment Managers Private Limited and select your Investment Approach Name for viewing the stated disclosure. The calculation or presentation of performance results in this publication has NOT been approved or reviewed by the SEC, SEBI or any other regulatory authority.

Why Kings of Capital is a differentiated portfolio

Source: Marcellus Investment Managers, Bloomberg

Marcellus’ Kings of Capital Portfolio is a financial services focused PMS in India. Launched in July 2020, it consists of boring, profitable high return businesses with clean corporate governance and attractive valuations. The portfolio is unique because:

• No index hugging, only bottom-up stock picking with a focus on variant perception
• Lowest exposure to large banks (HDFC, ICICI, SBI, Axis, Kotak) amongst over 20 BFSI mutual funds in the country
• Zero exposure to PSU banks and PSU NBFCs – again only BFSI fund in the industry with this positioning.

Our in-depth coverage of 35+ financial services stocks has been augmented by a wide network of experts along with access to management teams across listed and unlisted financial services companies. This has helped KCP to invest in robust businesses which are under-represented in mainstream indices – including wealth managers, credit rating agencies, non-life insurers, mutual fund distributors, commodity exchanges, providers of cash management services etc. The result of this is that since inception KCP has a beta of less than 1 which is counter-intuitive for a financial services portfolio

What is our hunting ground and what are we looking for?

Source: Marcellus Investment Managers; All company names, logos, and trademarks displayed in this document are the property of their respective owners. Their inclusion is solely for identification and informational purposes, and no ownership, affiliation, sponsorship, or endorsement by or with the respective trademark holders is claimed or implied.

• Sustainable business models and low risk balance sheets: We prefer companies with high free cashflow generation and lower leverage versus peers in the case of lenders. Eg. wealth managers, credit rating agencies
• Companies which demonstrate profitable market share gains: We prefer companies which gain market share without compromising on profitability. Eg. private insurers, private banks
• Competent management teams with a track record of shareholder value creation: We prefer management teams who have historically demonstrated a track record of wealth creation for shareholders. Eg. Bajaj Finance, Chola
• Companies with excess capital – room to make mistakes and to experiment: We avoid lenders with low capital adequacy and are okay to invest in overcapitalised companies even if that results in optically lower returns on equity. Eg. Kotak Bank
• Valuation discipline – Overall portfolio valuations to not exceed 20% premium over index

Interest rates are likely to start rising soon

The European Central Bank has already began raising interest rates and the Fed has been making hawkish choices. Naturally therefore with inflationary pressures mounting and with the INR under relentless pressure the RBI too is increasingly leaning towards rate hikes. As reported by the Business Standard earlier this week,

“The markets were surprised by the hawkish commentary from the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) last week…While explaining how the market missed the message for a need to recalibrate policy rates, Saugata Bhattacharya, external member of the MPC…says the cost of policy action and not falling behind the curve in controlling inflation must be balanced…The MPC minutes have been interpreted as hawkish by the market.” (source: https://www.business-standard.com/finance/interviews/not-suggesting-next-policy-move-is-a-hike-but-there-is-a-need-to-relook-126082401519_1.html)

A rising rate environment will separate the men from the boys

“Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on.”— Howard Marks (source: https://www.goodreads.com/quotes/9630747-prosperity-brings-expanded-lending-which-leads-to-unwise-lending-which)

Over the past 4 years, India has enjoyed a relatively benign liquidity and credit quality environment. As a result, every single listed bank in India now has net NPAs less than 1% of their book, a miracle never witnessed before in India’s financial system (source: https://www.business-standard.com/opinion/columns/no-listed-bank-has-even-1-net-npa-a-milestone-for-asset-quality-126082300705_1.html).

Given the mountain of debt that Indian households have racked up (see Chapter 6 of our book, “Breakpoint: The Crisis of the Middle Class & The Future of Work”), a rising rate environment is likely to pose a stern test for second rung lenders in India. That in turn will result in credit quality diverging between the best run lenders (such as our investee firms like Bajaj Finance, Chola, HDFC Bank and ICICI Bank) and the ordinary lenders. That in turn will create scope for our Kings of Capital to outperform even more.

Investment implications

Since the Indian economy was liberalised in 1991, it has followed a relatively predictable pattern where every decade contains 3-4 years of benign years of late interest rates and bullish conditions in the stockmarket followed by 6-7 years of more difficult conditions. For example, 2003-07, the Nifty50 compounded at 41% p.a. Then from December 2007 – January 2014, the Nifty50 did not compound at all.

By dint of its Quality centric focus, Kings of Capital is designed to delivers its strongest performance in these more difficult phases where the broader stockmarket is having trouble generating compounding.

To invest with us in KCP, click on kcp.marcellus.in or use the QR code shown below

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The stocks mentioned above may form part of Marcellus’ portfolio. Marcellus, its clients, and/or its employees may therefore have an interest in the said stock(s).