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Carnelian Capital Compounder Strategy

 

Carnelian Compounder Strategy aims at delivering superior returns across market cycles through its unique MCO framework. In the Carnelian world, we believe investing success is an outcome of making good decisions consistently over a long period of time. Good decisions are those which are made “Objectively, Free of any bias”, considering “Probability of outcome” and factoring “Risk reward”.  

Carnelian Compounder Strategy is a long only, multi-cap, sector agnostic strategy, with an objective to generate sustainable alpha and compound capital over a long period of time through the MCO framework. The Strategy offers a unique & unconventional blend of Magic (accelerated growth), Compounder (stable growth) & Opportunistic companies.  

 

What is MCO framework

The MCO framework focuses on investing under carefully designed three baskets

Magic 

Aims at capturing earnings growth and valuation rerating 

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  • Management/CEO change 

  • Industry structure change 

  • New growth catalyst 

  • Product innovation  

  • Completion of capex phase 

Compounder

Aims at capturing earnings growth over a long period of time led by MRFG 

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  • Large opportunity size & sustainable Moat 

  • High ROE - efficient capital allocation 

  • Robust Free cash flow generation 

  • Growth & Governance 

Opportunistic

An opportunistic way of capturing opportunities market might offer 

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  • Deep value with cash flows 

  • Special situations – IPOs/ mergers/ demergers/ delisting 

  • Temporary headwinds 

 

Forensic Expertise

In investing, avoiding an accident is equally important as getting the investment hypothesis right.  

We come from Marwari families where our forefathers are used to seeing “where is our profit vs what is our profit”. We learnt our first lessons from them to ascertain profits from the balance sheet not the P&L. Our childhood learnings learnt working with them coupled with professional qualification of Chartered Accountancy has immensely helped us. 

This Unique capability and rich experience of over 12 years on forensic research of the companies’ annual reports and seeing through some of the obvious accounting practices or frauds, helps us avoid accidents of investing in companies with dubious intent or misplaced objectives.  

Our unique forensic framework deep dives into the following before investing, what we call “CLEAR”.

C – Cash flow Analysis & Capital Allocation. We assign zero value to profits without cash flow conversion. We deep dive into source of cash flow instead of reported cash flow

L – Liability Analysis, True debt vs Reported debt, Contingent liability and likely impact on future earnings

 

E – Earning Analysis, True Economic Profit vs Reported Profit, Discretionary vs non-discretionary profit

A – Asset Quality Analysis, Some worrisome points - huge built up in loans and advances, large quantum of long duration inventories/receivables susceptible to value diminution, large payables supporting large receivables/inventory, profits getting re-deployed in non-core/expensive/uncertain inorganic growth, profits getting into intangible assets/goodwill – without visibility of commensurate profitability, subsidiaries/JVs which require consistent infusion of profit without any visibility of returns.

 

R – Related party transaction & Governance issues

Pitfalls we avoid

Learned Investment Guru Charlie Munger says, Invert, always invert. Tell me where I will die, I won’t go there.

Below illustrated are companies / managements we will not invest with:

  • Companies with aggressive accounting practices

  • Companies with high financial leverage

  • Companies with low tax incidence

  • Companies with the management having no skin in the game or misaligned objective

  • Managements with consistent poor governance track record

  • Managements in a hurry to create value

Investment Process

 

Portfolio Construction

  • Universe ~20 – 25 stocks

  • Avoid concentration

      -Sector limit ~ 30 – 40%

      -Stock  limit  ~10%

  • Ensure adequate portfolio level liquidity- 30% of portfolio can be liquidated within 5 days

  • Low churn

  • Well defined internal risk management & insider trading policy

 

Investment Options

PMS

Portfolio Management Services (PMS) offers to manage client’s fund in the own individual name. We offer the above strategy under the PMS guidelines, wherein the minimum investment is INR 50 lakhs with the option of SIP.

AIF

Alternative Investment Fund (AIF) – An AIF is a privately pooled investment vehicle that collects fund from sophisticated investors to invest with a certain investment strategy to attain specified objectives.  

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Carnelian Capital Compounder Fund is a category III AIF with an objective to generate sustainable alpha and compound capital over a long period of time. As per SEBI guidelines, the minimum investment amount is INR 1 crore.

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For more information Read FAQs or Contact us.

© Carnelian Asset Advisors LLP. 

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ADDRESS

B-1405, One BKC, Plot No. 66, G Block, Bandra Kurla Complex, Bandra (E), Mumbai-400051

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