BAAP comes to bite: Saurabh Mukherjea admits lag in portfolio performance, cites valuation missteps

Saurabh Mukherjea

In his latest newsletter to investors, Saurabh Mukherjea alluded to valuation missteps as the key reason behind the underperformance of Marcellus’ flagship scheme, which has significantly lagged benchmark performance over the past five years.

Mukherjea acknowledged that not making portfolio adjustments based on “learnings on valuations” capped performance at a level aligned with earnings growth, while benchmark returns far exceeded earnings growth.

In his March 12 newsletter, Mukherjea detailed the performance of the Consistent Compounders Portfolio (CCP). Mukherjea stated that during FY19-24, the CCP portfolio recorded a 17.8% EPS CAGR.

This was based on a 12-month sequential roll of the portfolio, consisting of 18.2% for the 2019 cohort, 10.7% for 2020, 24.6% for 2021, 18.9% for 2022, and 17.2% for 2023. Mukherjea pointed out that this was similar to the CCP’s pre-fee and expense performance of 17.4% for the five-year ended March 31, 2024.

While acknowledging that the portfolio's pre-fee performance could have exceeded the EPS CAGR by a reasonable margin, Mukherjea noted that the failure to act on valuation learnings prevented this.

He explained, “Besides earnings growth, another important short-term factor contributing to a stock’s share price performance is changes in its valuation multiple (P = P/E * E). There are a few learnings around valuation changes we could have incorporated sooner, such as the de-rating of quality lenders over the last three years as their ROEs moderated amidst changes in the regulatory environment and the risk of an unwinding of peak valuations for quality businesses from their 2021 highs.”

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Mukherjea has faced severe criticism in the past for his “buy-at-any-price” investment strategy, defending investments in high-quality stocks at significantly high price-earnings multiples. Many of these stocks have underperformed over the past few years as their growth slowed, moats got challenged, and valuations became unsustainable.

Mukherjea noted further in the newsletter: “In a low-churn, concentrated portfolio with long holding periods, earnings are the predominant source of performance contribution over the long term. The other factor—the one that most investors obsess about—P/E multiple changes—is a more meaningful contributor over the short term but a relatively small contributor over the longer term (because, in the long term, P/E multiples mean revert).”

Interestingly, Mukherjea made these remarks while elaborating on the CCP’s performance for a longish period from 2019 to 2025. Marcellus’ CCP, its flagship fund, has consistently underperformed, lagging benchmarks by a wide margin across all time periods. Over 1-year, 3-year, and 5-year periods, the fund has delivered returns of -1.29%, 2.37%, and 9.07%, respectively, versus Nifty 50’s 1.89%, 10.93%, and 15.96% as of February 28, 2025.

Since inception, too, the fund has underperformed the benchmark, returning 12.39% compared with 13.36% for the Nifty 50. Marcellus’ mid-cap fund has similarly struggled, delivering an annualised return of 8.12% over a five-year period versus 17.93% for its benchmark, the BSE 200 index. Since inception, the fund has returned 11.68% compared with 16.81% for the benchmark as of February 28, 2025.

Mukherjea added that recent changes to the portfolio have enhanced the EPS CAGR of CCP. The 2019 and 2020 cohorts exhibited weak earnings growth from FY20 onwards. However, from the 2021 cohort onwards, this changed. Specifically, the 2021, 2022, and 2023 cohorts demonstrated strong earnings growth.

Mukherjea noted that had the 2019 or 2020 cohorts remained unchanged, the subsequent EPS CAGR of the portfolio constituents would have been around 11%-13% instead of the 17.8% recorded. In contrast, the Nifty 50’s EPS CAGR stood at 16.4% over FY19-24 and 24.3% over FY21-24—a pace higher than long-term averages due to tailwinds in cyclical sectors like commodities and government capex-oriented industries.

Additionally, Mukherjea noted that CCP’s EPS growth could have surpassed the 17.8% EPS CAGR it achieved over FY19-24. He attributed this to structural shifts in the Indian economy post-Covid. The combination of superior physical and digital infrastructure, the benefits of economic integration post-GST, and a structural drop in the cost of capital (as 100+ million Indian families shifted their savings from physical to financial assets) led to two key developments:

1. Smaller companies aggressively expanded into domains previously dominated by larger players, such as Astral Poly entering the paints industry.
2. Well-managed large companies realised the opportunity to expand into new industries.

“However, having made the corresponding changes to our portfolio constituents over the past 12 months, we are well-positioned to benefit from the accelerated growth rates of Enterprising Compounders,” he concluded.

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