Over the past decade, India’s Financial Services sector has been hammered by demonetisation, and history shows that investing in high-quality financial stocks during a crisis proves to be highly rewarding, Saurabh Mukherjea, Founder and CIO of Marcellus Investment Managers said during a podcast ‘D-Street Talk’ with Moneycontrol on his new PMS scheme “Kings of Capital”.
The key objective of the “Kings of Capital” strategy is to own a portfolio of 10 to 14 high-quality Financial companies (banks, NBFCs, life insurers, general insurers, asset managers, brokers) that have good corporate governance, prudent capital allocation and high barriers to entry.
The three tenets for selecting stocks in Kings of Capital remain:
a) Clean accounting and good corporate governance;
b) Historical evidence of prudent capital allocation; and
c) High barriers to entry so that companies are able to sustainably generate a return on capital higher than the cost of capital.
Given the inherently leveraged business models of Financial Services companies, the importance of each of these traits is further amplified and therefore we believe we can put our skills around forensic accounting and understanding barriers to entry to good use to create a portfolio of high quality Financial Services stocks, says Mukherjea.
Keeping this in mind, a portfolio was created that includes high-quality lenders, general insurers, life insurers, asset managers, and brokers.
The case for investing in high-quality financial stocks during a crisis
Investing in financial stocks during a crisis delivers not only outsized returns in relative terms but also in absolute terms.
For example, if someone invested in the Bank Nifty when it bottomed out during the Lehman crisis (on 9th March, 2009), your five years compounded return would have been 28 percent.
Even if they had invested three months prior to the bottom, your five-year return would still have been a very respectable 21 percent.
The reason that this happens is that investors enjoy the following tailwinds by investing in high-quality Financial Services stocks during a crisis:
Acceleration of growth of high-quality lenders due to market share gains post the crisis (as the weaker lenders fade away); normalisation of NPAs and system-level credit growth once the crisis ends; and normalisation of P/E multiples as economic growth, credit growth, and NPAs normalise.