We are primarily growth investors. We never buy something just because it’s cheap. Of course, we like cheap stock provided it is growing. So, growth is very, very essential to us. We look at growth in into two baskets – Magic Basket and Compounder basket.
The Magic Basket aims at capturing magic moments in the lifecycle of a company resulting in growth & valuation re-rating.
While the literal meaning of Magic is having supernatural power/qualities, however, in the Carnelian investing world, Magic moments are change/catalysts in the life of a company – when the company gets into a new growth trajectory, but not recognized by the Markets.
Markets starts recognizing them as the change unfolds over a period of time, leading to a valuation re-rating, thereby creating a significant wealth generation opportunity.
Objective: Capture “magic moments” in a company’s lifecycle that result in significant growth and valuation re-rating.
Portfolio Allocation: This strategy typically makes up 50-60% of the portfolio.
Investment Strategy: Focus on businesses showing a significant acceleration in growth, surpassing their historic growth trajectory, driven by key catalysts that are not yet fully recognized by the market.
Key Catalysts for
Acceleration
New Growth Catalyst
Product Innovation
Completion of Capex Phase
Change in Industry Structure
Management/CEO Change
Historical
Challenges
Good business + average management/CEO
Good business + average management/CEO
Good business + average management/CEO
Good management + low returns due to long gestation investment
The catalyst can be either one of or a combination of the above.
Through our decades of investing experience, we have found that post such events, companies usually deliver superior returns over a long period of time. Of course, one has to put in lot of effort in understanding these catalysts to get it right.
We have deep dived into a universe of 250 companies to back test our magic hypothesis – preceding 5 years to the magic event, average returns were ~14% CAGR vs ~54% CAGR for the following 5 years (post magic event). Even after adjusting for cases where the magic event did not played out, this number goes down to 56%. Of course, one would not be able to capture all the opportunities all the time and there could be some survivor bias, but this framework helps in capturing great opportunities.
The data below illustrates Returns for pre-magic /post-magic period
The Compounder Basket aims at capturing earnings growth over a long period of time. Many companies having created a significant moat around their businesses, managed by exceptionally talented managers, delivers a superior stable return over a long period of time. Such companies are usually well discovered, well owned, richly valued and remain so as long as MRFG characteristics are intact.
Objective: Achieve superior stable returns by investing in businesses with sustainable growth, efficient capital allocation, and the ability to compound returns over a 5-year investment horizon.
Portfolio Allocation: This strategy constitutes 40-50% of the portfolio.
Key Traits for Investment
Moat: Focus on stable businesses with a large opportunity size and a sustainable competitive advantage (“moat”).
High ROE (Return on Equity): Prioritize businesses that demonstrate efficient capital allocation resulting in high returns on equity.
Growth & Governance: Invest in businesses that are not only growing but also have strong governance practices.
Robust Free Cash Flows: Target companies with strong and consistent free cash flow generation, indicating a well-established and resilient business model that performs well across economic cycles.
15%
Alpha CAGR
17%
Sales CAGR
21%
PAT (Profit After Tax) CAGR
26%
Average ROE
31%
Market Cap CAGR
The strategy emphasizes investing in stable businesses at “fair” valuations, which leads to compounding returns over time.