You handle over Rs 600 cr in AUM. The capital builder fund has given a CAGR of over 14% in the last 10 years. What was your strategy?
Yes, you are right this 31st March I completed managing 10 years of Emkay Capital Builder PMS. Over this 10-year period, we have nearly quadrupled the money (3.84x) for investors, delivering returns of 14.4% CAGR. We have outperformed both the Nifty 50 & the Nifty 500 over the last decade, delivering 37.8% more returns over Nifty 50 and 24.1% more returns over Nifty 500. Our strategy from the very beginning has been on ‘Power of Compounding’, the entire portfolio construct over the last 10 years has been in that direction. Let me back this –up with some data points,

More than 90% of the capital gains we have booked are long term capital gains.

Our portfolio turnover ratio is under 20%, whereas the average mutual fund equity scheme turnover is in the range of 70%-85%. But to my mind the most important and the proof of the pudding is, that in our current portfolio holdings, nearly 45% of the portfolio value has more 7+ years of vintage, the next 37% of the portfolio has a vintage of 3-6+ years, so you can imagine how long term we are, if 80%+ of our portfolio has a vintage of 3-8+ years. This we believe is the true strategy and winning factor for us.

In fact, When Total Returns over longer period of time are clocked in, one does witness the power of compounding. As Einstein mentioned, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

If someone would have invested 50 Lakhs (Hypothetical) 10 years back, what kind of corpus they would have built in these years?

The investment would have now risen to nearly Rs 2 cr (1.92cr) in 2023.

You have clocked 10% outperformance over the benchmark Nifty500 index. Consistent performance also leads to compounding if investors stay with the fund for that long. Tell us more about the eighth wonder of the world in this real-life scenario.

Whatever I have presented above is our real-life journey and experience. But let me also give you a couple of more examples,
For us, a very gratifying part of FY23 has been that the top-performing stock in the NIFTY 500 universe is Apar Industries (up by 285%, in the last year), one of our key holdings for the last 4-5 years.

This once again re-imposes faith in our investment process of believing in quality management (E-QUAL model) and following a disciplined approach of staying invested in quality businesses, for the power of compounding to play out. The other big alpha generator for us in FY23 is another long-holding compounder and our top holding – ICICI Bank (up 20% in FY23). It is also among the best-performing large private banking stocks in the last 1, 2, 3, and 5-year periods.

We have been owning quite a few other stocks for last more than 5-7 years, companies like Divis Lab, Sundram Fasteners, HDFC Bank, NESCO, and Mahindra Holidays.
We have owned this stock through the thick and thin of times, good patches/bad patches are part of business cycles, but that doesn’t make Good Companies – Bad Companies and in most of cases even vice-versa is not applicable.

So that really is our mantra, as long as companies and managements are not treading their paths, and they are very focused on doing the right things for all the stakeholders, just be with them…at some point, in time the Eighth Wonder of the World will kick into your portfolio.

Also highlight risk-management practices adopted by the fund.
I strongly believe risk management has to be implemented right at the beginning/start, basically when it comes to risk management in investing it starts at the time of buying/purchase of securities.

Majority of the bad investments will be linked to either one or both classic errors –
1) Error of Quality – Poor / Low Integrity / Capability Managements
2) Error of Valuations – Wrong Purchase Price – Very High Valuations
There is also a third error from a portfolio perspective,
3) Allocation Risk – Lopsided allocations to a particular security or sector.

And any or all of the above errors can prove to be very costly. Therefore, to make sure we avoid the above blunders, we have an investment process that we created nearly 11 years back and have been following it very religiously, we created our proprietary module – Equal, this module helps us evaluate very objectively management quality with publicly available data points.

A Risk-Reward matrix to determine a good Purchase Price is also embedded in the module.

How do you filter stocks for your portfolio?
In our EQual module we have 30 odd parameters and each parameter has a range of score, depending on the aggregate score a company commands the module suggests whether the company is eligible for our investment framework.

We also have some Red Flag parameters, that override the EQual score. There are also other various parameters we are focused on while selecting the businesses.

Track Record – Cash Flows, Balance Sheet
Business Opportunity – Scale, Industry structure
Inherent Profitability – ROCE, ROE
Management Quality – Integrity, Strategy, Execution
Purchase Price – Valuations

Please take us through some of your winning bets in the fund. How should one spot emerging multibaggers?
As mentioned earlier, over the last 10 years we have had many compounders in our portfolios, stocks like ICICI Bank, Divis Lab, Sundram Fasteners, and HDFC Bank have delivered some of the best returns during our long holding periods.

But I think the key point is not only spotting them but clinging on to them even when they are hit by external challenges or sometimes even internal challenges.
Like in our portfolio stocks, ICICI Bank had a long patch of NPA declarations, write-offs and eventually accompanied with challenges at the Top Leadership level but it was during those times we were focused on the company’s overall other parameters like CASA growth, Capital Adequacy, Credit Growth in Retail, etc.
Also, another portfolio company Divis Lab had US FDA challenges in the year 2016 -2017, it was during those times our conviction in the management quality was tested and we did cling on to the company to reap extraordinary benefits once the management stand was vindicated over the next few quarters.

Take us through your Emkay GEMS portfolio as well. What makes you positive on auto, financials, and IT where you have allocated double-digit stake?
Emkay GEMS is a very uniquely curated portfolio strategy, our investment universe is only 150 mid-cap stocks, but again here we look for compounders.
Applying our internal factors, we eliminate a vast majority of the 150 stocks as we curate a portfolio of only 20 stocks, which each of them having equal weights. Since we want to have compounders, the allocations to secular growth sectors like Auto, Financials and IT will have higher allocations.

Smallcaps dominate Emkay Pearl portfolio. What is your view on small and midcap space for FY24?
Emkay Pearls also has an 11-year track record, over here we have delivered nearly 18% CAGR returns, once again beating the benchmarks with a wide margin. India is a land of entrepreneurs, and therefore there will always be plenty of opportunities for bottoms-up investing.

In fact, our endeavor over here is to invest in small-cap companies, which over a period of time with the Power of Compounding become mid-caps or even large-caps.
We have had a few experiences such as Sundram Fasteners, Apar Inds, Laurus Labs, Tata Elxsi, and a few more.