CCF (Carnelian capital compounder fund) is long only, multi-cap, sector agnostic fund focusing on capturing the “trillion-dollar India opportunity”,” says Manoj Bahety, CFA, Founder at Carnelian Capital Advisors LLP.
In an interview with ETMarkets in association with PMSBazaar, Bahety, said: “Under this fund our objective is to create a concentrated portfolio of 25 stocks within our QARP (quality companies at a reasonable price) framework,”
You are managing more than Rs 1900 cr in AUM – tell us a little bit about the performance of PMS schemes in FY23.
FY23 was a bit challenging for investment managers across asset classes owing to macro headwinds and geopolitical issues, entire world is grappling with. Despite the above challenges we are happy to state that all our flagship schemes have generated decent outperformance vs benchmark.
Couple of our strategies YNG and Shift theme (Carnelian Shift strategy (CSS) and Carnelian structural shift fund (CSSF)) have delivered decent positive returns vs negative returns of most benchmark indices. It is heartening to report that our YNG strategy has delivered 13% and CSSF @ 7.6 % positive returns for our investors during FY23.
Our focus on risk-reward framework and process-oriented approach have helped us to sail smoothly during turbulent 2023.
You are also managing one AIF – Capital Compounder. Data provided by PMS Bazaar suggests that the fund is giving a CAGR of 15% since 2019. What is the strategy and how do you pick stocks?
CCF (Carnelian Capital Compounder Fund) is long only, multi-cap, sector agnostic fund focusing on capturing the “trillion dollar India opportunity”. Under this fund our objective is to create a concentrated portfolio of 25 stocks within our QARP (quality companies at a reasonable price) framework.
Most of the companies in this portfolio have niche core competence, large opportunity size, large proven track record & impeccable management capabilities.
We identify opportunities / growth in two broad baskets.
Magic (50-60% of portfolio) - catalytic/ change oriented approach: Here our approach is to identify companies with visible change likely to result in accelerated earnings growth and valuation rerating. We have identified various catalysts and created ideation engines around that. These ideas are thoroughly evaluated within our risk-reward framework before including them in our portfolio.
Compounder (30-40% of our portfolio) – Blend of companies with sustainable earnings growth; business moat, capital efficient business with large opportunity size, decades of proven leadership without any foreseeable disruption risk.
Tell us about your unique ‘Clear’ forensic framework which is being used in every strategy?
In investing, avoiding an accident is equally important as getting the investment hypothesis right. All our stocks have to undergo two steps of forensic filtering.
We have created an automated forensic template, which helps us to identify potential red flags followed by a detailed deep dive by a dedicated forensic team using our CLEAR framework (Cash flow analysis, Liability analysis, Earnings quality analysis, Asset quality analysis, Related party & governance issues).
The above framework helps us to avoid companies with governance issues, balance sheet risk, capital allocation issues, aggressive accounting etc.
Your YnG portfolio is very unique and is designed to capture Yield and Growth across themes. How do you pick stocks for this portfolio?
YNG portfolio has been specifically curated to deal with hyperinflationary situations. It is a concentrated portfolio of 10-12 stocks (predominately in the private sector) with an objective to capture both dividend Yield and earnings Growth.
This portfolio offers 4-5% dividend yield & 10-15% earnings growth. The portfolio is targeted to generate debt ++ kind of returns with lower volatility risk.
Launched in 2020 – Carenlian Shift Strategy is giving a CAGR of over 30% which is huge (according to PMS Bazaar data). What makes you so bullish on Engineering Capital Goods, IT, and autos?
Manufacturing post pandemic has acquired a new decadal growth driven by Import substitution and Export opportunity. Government of India has led several initiatives to take manufacturing GDP from 16% to 25% resulting in India’s manufacturing GDP will go up from USD 450bn to USD 1.25 tn over next few years.
China+1, cost competitiveness and strong demand are additional growth drivers. Moreover India has a large talent pool and domestic market to support above. Companies involved in manufacturing across sectors will be the biggest beneficiaries of the evolving global situation on account of export opportunities opening. Exports of merchandise goods have already started to see and uptick.
Capital goods companies have a robust order book driven by large government capex and private capex in sectors like – renewables, chemicals, API, consumer durables, defense, Auto and auto ancillaries.
How do you pick stocks from the small & midcap space?
While investing in mid and small cap can offer exponential growth opportunities, however one has to be very careful in analyzing risk elements. It is very easy to lose one’s hard earned capital as these companies are still evolving as an institution, setting up systems and processes and have limited track records.
The most important criteria for us while picking up mid cap stocks is opportunity size, business moat, quality of management. We also pay a lot of emphasis on governance, organization culture, balance sheet quality, capital allocation framework etc.
While investing with mid cap companies we invest significant time in meeting top level as well as second level leadership team including plant, HR, risk heads etc.
What is your view on markets for FY24?
FY24 will be a year of volatility and lots of opportunities also. The Indian economy is relatively insulated from what’s happening in the US/Europe & India is one of the most underleverage countries.
Issues in the western world and current geopolitical issues are likely to benefit India structurally as more investment will flow to India. Banks are well capitalized, corporates are not levered, capacity utilization is picking up.
We have a stable and business-oriented government and India is considered as a reliable global destination. We see immense opportunities for investing in manufacturing sectors like : Auto & auto ancillaries, Chemical & API, Pharma, consumer durable, defense and BFSI credit.
IT may have short term headwinds; however, current valuation is much better vs one year back.
We believe markets are currently at a reasonable valuation and one should build up the portfolio for a period of 3-5 years.