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.
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.
Aims at capturing short-term opportunities offered by markets from time to time
This basket is an opportunistic way of capturing opportunities market offers from time to time on a short-term basis (3-12 months) and may not meet all the conditions of Magic and Compounder basket to hold for long term but we have a high conviction around the risk reward it offers. Markets tend to offer such opportunities very often. This is an optional basket and if there are no opportunities, we will not invest.