In his widely-tracked Consistent Compounders Portfolio, full of bluechip gems like Asian Paints, HDFC Bank, Bajaj Finance and Nestle, Mukherjea’s Marcellus Investment Managers says they made mistakes around the assessment of capital allocation decisions.
ITC, which became a darling of retail investors and several value investors due to its inexpensive valuation, strong moats and high dividend yield amid the pandemic, was one of the favourite stocks of Mukherjea too before Covid.
“We continued to stay invested in ITC until early-2020 despite its lack of capital allocation towards adding new revenue growth drivers. This was because we could not clearly split our assessment of the quality of its formidable moat from its capital allocation decisions while drawing comparisons between ITC and other companies in our coverage universe,” Marcellus said in a note to its investors.
ITC, however, had a modest position size in the portfolio, given low expectations of its fundamental growth rate.
In the case of Page Industries, which sells the Jockey brand of innerwear, Marcellus says their position sizing until FY19 did not reflect the firm’s inadequate investments in technology when the going was good. “Behind the scenes, the firm didn’t invest adequately enough in technology, systems & processes around its distribution and supply chain over the period 2014-2018. Our research carried out until FY19 did not pick up this lack of tech investments and hence the risk of operating inefficiencies in a business which was fast expanding its range of SKUs,” the firm said.
It said even though their investment team correctly identified the strengths of Page Industries’ business, the position sizing of the stock did not reflect the risks. Page Industries was amongst the highest allocation stocks in CCP portfolio in FY19. After spotting the mistake, Team Mukherjea reduced the allocation to Page in mid-2020.
“We decided to stay invested in Page Industries since our Investments team kept getting tangible data points on the improvement in the capital allocation discipline of Page. Over the past three years, Page has transformed its IT infrastructure and its systems and processes across all its functions to create a seamless supply chain.,” it said.
Inspired by the ‘Coffee Can’ style of investing, Mukherjea’s Consistent Compounders Portfolio (CCP) is a bet on high-quality stocks that can compound consistently for long periods of time.