'My first failure...’: Saurabh Mukherjea admits valuation gaps dragged Marcellus' returns

After a sharp fall in Marcellus Investment Managers' PMS assets, founder Saurabh Mukherjea has responded to critics with a candid admission of missteps and a call for more scrutiny. Acknowledging gaps that led to underperformance, Mukherjea said, “Please keep the criticism coming. My colleagues at Marcellus Investment Managers and I will be the wiser for it.” 

Notably, the fund’s flagship Consistent Compounders Portfolio (CCP) delivered a 17.4% CAGR in returns over FY19-24, largely in line with its earnings growth of 17.8% during the same period.

In a LinkedIn post, Mukherjea reflected on failures, drawing parallels from his personal life to recent challenges at Marcellus. "My first failure that I can remember was failing Hindi in Class 3 in St. Columba's School, New Delhi. Thereafter, my life has been littered with failures... and most recently, failure to beat the market over the past 3 years," he wrote. Quoting Nobel laureate Daniel Kahneman, he added, “Do you have any idea how lucky you are to have thousands of people who can tell you you’re wrong?” urging market participants to continue their criticism.

In its March 12 investor newsletter, Marcellus admitted that valuation mistakes were central to the fund’s recent underperformance. It noted that not acting on “learnings on valuations” led to returns merely tracking earnings growth, while benchmarks surged ahead. The CCP portfolio's EPS CAGR over FY19-24 stood at 17.8%, closely aligned with its pre-fee return CAGR of 17.4%.

“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,” the note said.

The fund has faced repeated criticism for its "buy-at-any-price" approach, with many high-quality stocks underperforming as growth slowed and valuations turned unsustainable. Over 1-year, 3-year, and 5-year periods, CCP delivered returns of -1.29%, 2.37%, and 9.07%, respectively—far behind Nifty 50's 1.89%, 10.93%, and 15.96%.

Mukherjea acknowledged that early cohorts of the CCP, particularly from 2019 and 2020, showed weak earnings growth, pulling down the portfolio. However, changes made in recent years improved EPS growth, with the 2021, 2022, and 2023 cohorts showing stronger performance.

He also reflected on structural changes in the Indian economy post-Covid, which Marcellus was slow to capture. He noted smaller companies' aggressive expansion and large companies diversifying into new sectors. 

"Increasing allocation to Enterprising Compounders could help CCP benefit from these shifts," Mukherjea wrote. While admitting this realization came "12 to 18 months later" than ideal, he concluded, “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.”