From $1M to $1B AUM: How Saurabh Mukherjea Built His Fund With No Salaries

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In this episode of the Capital Alliance Podcast, we sit down with Saurabh Mukherjea, the Founder and CIO of Marcellus Investment Managers.

Saurabh is one of India’s most influential fund managers, a prolific author of bestsellers like Coffee Can Investing, and a pioneer in democratizing investing for the Indian public.

Saurabh shares how he went from being an immigrant kid in suburban London to building the fastest $1 Billion AUM firm in India.

Follow Saurabh Mukherjea:

Marcellus Investment Managers: https://marcellus.in
Saurabh on Twitter/X: https://x.com/saborwm

Saurabh’s book Coffee Can Investing : https://www.amazon.in/Coffee-Can-Inve...

Capital Alliance on LinkedIn: https://www.linkedin.com/company/myca...

Follow Ken Majmudar :

Linkedin :   / kenmajmudar 
Instagram :   / kenmajmudar 

Transcript

SPEAKER_05 0:00

Bought Sarum Mukherjee from Marcellus and find out what he's been doing in this market. Someone you know already is no new face to the capital market. Sarum Mukherjee from Marcellus. If somebody is a um US investor or perhaps a European investor, uh and they're trying to think about where to allocate their funds, where does India fit into the Pantheon of options?

SPEAKER_03 0:26

If we look at the data of 10 years, 20 years, 30 years, 10, India stands head and over to any other emerging market. Dollar returns over 20 years, I think at 10 and a half, that's only the only market in the world emerged or emerging amongst the large markets. Only market which is vast India shoulder to shoulder returns over 10 and 15 years. United States, right? It's even a state ball market.

SPEAKER_01 0:51

From your experience, um, how do you define a successful money manager?

SPEAKER_02 0:56

Well, I think it really distinguishes a legend from the rest of us to be able to be authenticated. It's the ability to actually investigate yourself for what the world is saying.

SPEAKER_05 1:15

This podcast is sponsored by the Capital Alliance Mastermind, a private community where fund managers share deal flow, build relationships, and grow together. Join the wait list in the first link below. Um hi everyone. Uh it's my pleasure to welcome you back to another episode of the uh podcast. Uh I'm gonna let uh Vatsal introduce our guest, uh Sarab Mukherjee. Uh, I had the pleasure to meet Sarab in India when I was there uh just about um a month and a half ago. Uh Sarub was generous enough to uh meet with us and share his insights. Uh, and I'm very excited to uh have him uh share what I think will be a fantastic episode. Uh so Batsal, why don't you introduce Sarab?

SPEAKER_01 1:58

Yeah, uh thank you again, and it's a great privilege to have Sorab with us today. So Sorub needs really no introduction in the investment world in India and globally. Um he's the founder and CIO of Marcellus Investment Managers. Um, and uh he was also the co-founder of Clear Capital and the CEO of Ambit Capital uh right before setting up Marcellus. Um he was educated at the London School of Economics, where he earned uh a bachelor's and a master's in economics. And he's also founding director of the Association of Portfolio Managers in India and continues to be a part of multiple SEBI working groups. Uh but I think more most importantly, uh, and I can say this personally, I think Soram has probably been the best teacher. Um, and he's democratized investing to the Indian public. And the way he has taught us stock picking and portfolio management, I I think no other money manager has done it. And he's a prolific author, extremely erudite. And um, some of his books that I've really enjoyed are Diamonds in the Dust, um Coffee Can Investing, and The Unusual Billionaires, which is a personal favorite of mine. So with that, um uh thank you for for uh coming today, Swara. Thank you, Watson. Thank you, Ken.

SPEAKER_05 3:16

Thank you, Ghostine. Yes, our pleasure. Um interesting. Coffee Can Investor was one of your books. I haven't read, I haven't read or gotten even copies of most of your books except for the the last one that you gave me.

SPEAKER_03 3:26

That one that one has actually just now been translated into into Thai, believe it or not. Because if hitherto it had been translated into um Hindi and Marathi. Um so originally published in English in 2018, then published then translated into Hindi and Marathi during COVID. But out of the blue, two months ago, Penguin wrote to us saying Penguin Thailand wants to publish it. So hopefully next time I go to Thailand, there'll be uh people who will know me for uh uh Indian Indian equities. Um one of the perks of our job.

SPEAKER_05 3:56

Yeah, that that would be great. Um I'm familiar with that concept only from a guy named Bob Kirby. Absolutely. Uh Capital Group. Uh so we learned it from him.

SPEAKER_03 4:05

We learned it from him, and uh Watsal mentioned unusual billionaire 2014. I was having dinner with two friends of mine. One of them uh is from Capital East, his uh capitalist named man in India, Nerud Datta. And the other friend was a guy called Shanjoy Bhattacharya, uh again, a celebrated investor in India. And over that dinner uh that night, 11 years ago, they they told me about coffee can investing in Bob Kirby. I hadn't heard of the Bob Kirby until that point. So when I jumped into the taxi, I googled Bob Kirby Coffee Can Investing, and I read the paper on the taxi on the way home. And by the time I got home, I said this can be applied to India. And then I kind of played around with a few things as to how do you apply coffee can investing to India? How do you find a bunch of great Indian companies and hold on to them for long periods of time? And ultimately, after a year of figgling, we figured that ROCE, return on capital employed and revenue growth would do the trick. I still remember 2015 summer is when the first bank test. We did a back test going back 25 years. If you bought stocks basis ROC and revenue growth, what would happen? And the short answer would you make a ton of money. Um, and that for me was a pivotal point in my career. So I have my friend Shonja and Anul that to thank for for telling me about Bob Kirby's paper, and I have the late, the late Bob Kirby to thank for writing. I think one of the most uh powerful full four pages in finance.

SPEAKER_05 5:34

Yes, I agree. Uh it's actually really interesting. So one of my uh partner, current partners, uh Terry McGuire, who works with me at Ridgewood, uh, he's uh passionate about dividend growth investing, but he was a partner at Capital for many years. And so uh when I started Ridgewood, um, or maybe just before, he was already working at Capital and he shared that paper with me. Right at the time, very few people knew. I don't think it was publicly available on the internet. But um, of course, I read the paper, it very much aligned with my thinking. Uh, because that's generally what I did is I bought stocks, I just, or things that I thought had merit, and I just held on to them. Uh and um yeah, so so it worked out nicely for you.

SPEAKER_03 6:18

The interesting thing, Kenan, this is there are some people who read the paper and say that this is rubbish, this is not gonna work. How can you hold the same companies for long periods of time? The world is dynamic, there's so much change. Right. Surely you have to you have to do something all the time. And I found that that the world separates into two camps people who are instinctively understand coffee can investing and those who don't.

SPEAKER_05 6:40

Yeah, interesting. I mean, it was my approach before I read any papers. It was just like somehow appealed to me or made sense. Probably because I'm lazy and I don't want to do a lot of work, you know.

SPEAKER_03 6:49

I think it might be many of us at that same boat as you can.

SPEAKER_05 6:52

Yeah, buy some good companies, get rich. I mean, what's wrong with that? You know, I didn't have to do any trades, I didn't have to pay any taxes, you know, just that's it. It's I I love it. Boring is best. But um, I you know, there's an interesting, I think that I mean, I would say persuasively, there's a lot of evidence that it's actually the better way because I I I'll give you one one metric that that um has come to light. So, you know, the venture capital firms, they have they they they've uh basically funded all these great companies, but then they sell them after 10 years uh to exit their fund. And it turns out that if any of the top firms had held on to any of their stakes, they would have done so much better than if they exited them. Uh that just tells you that and it and it's not even close, it's like trillions versus like billions, you know. Right. Um, so so it's an incredible uh validation of the coffee can uh concept, and but yet in a very different concept that that we can't obviously implement, being that we're not venture capital investors. Um, so what I want to do is go backward, uh Sarv. So tell us about your origin story. Um, you know, sort of how you started, when you first thought about, you know, going into the business of investing, um, what other businesses perhaps you worked in, or what what other careers you pursued. Uh, tell us about the evolution, uh, where you grew up and and how that led to you being a uh partner in Marcellus.

SPEAKER_03 8:19

So, look, I grew up in the suburbs of London. And honestly, I had no idea about asset management when I was growing up. I was a regular immigrant kid growing up in the suburbs of London. I got admission into the LSE. Uh, went there for four years. Incredibly, even at the LSE, I really had very vague ideas about asset management. Uh, luckily for me, one of my professors at the LSE was a renowned strategy guru, uh, still is, Sir John K. And uh Sir John took me under his wing and asked me to join him in a strategy practice after I graduated. So I worked with him for for three years. And he would take me along to board meetings. I would sit in the listen to him. My job was to carry his bag and summarize the board meeting and play it back to him in the office so that he could then uh give advice to the to the board. And uh as part of that, he sent me off to the uh UK regulator, helped the UK regulator create their rule book. So, not the most usual thing for a 22-year-old to do, but I learned a lot of I learned a lot creating the rule book for the UK regulator. And that's when I first came across asset management. So I was 23 when I first realized that there are people like us who get hired to analyze stocks and they give recommendations to fund managers and they buy stocks and manage the stocks too well, and the fund manager's fund is grows, and you can get promoted as an analyst. So I thought this sounds like a lot of fun. So I went and told John, look, I want to do this. Um, I think I can do this. Uh I passed my CFA exams. I studied on the local train up and down on the commute to work and passed my CFA exams. And I told John, I want, I think I want to do this, and uh, I think I can advise other people what stocks to buy. So John was not only supportive, he said, I'll give you a bunch of my money to get you going. Um, and he became uh a seed investor in clear capital. And uh I got together with a few other people and we started advising British families uh and and the fidelities and capitals in the UK on on UK listed small caps. So my entry into this profession was 2003 uh through British small caps. Uh platform clear capital made a name for itself in small caps. We became profitable pretty quickly. Uh so when I was 30, uh when I turned 30, you were voted amongst the voted amongst the top small cap analysts in the UK. But can uh then life took a slightly different turn. It was Jan 2007, I remember, when I figured out that the UK financial system is gonna blow up, right? And um I wrote a 50 pager for our clients explaining why the UK financial system is gonna blow up and which banks and which lenders you're gonna go under. And then I followed up with four or five 50 pages over the subsequent months, and uh by July, August 2007, which got most of our clients out of out of uh British stocks, right? And uh and it sort of spread over around the UK that there's disaster coming. That's when towards the end of 2007, my wife said that look, if you're so convinced that this system is gonna blow up, then why do you own a small financial services company in the UK? And I thought that's a good point. And we put clear capital up for sell, uh sale. Uh we put the firm up for sale in Jan 08. May 2008, we found a buyer. Uh, and uh that month, 11th May 2008, we sold the firm and I migrated to India. So that was the end of my career in the UK, and 2008 is 17 years ago when I arrived in India. Uh, first couple of years were spent understanding India and specifically we spent understanding accounting fraud in India, which I still believe is a meaningful challenge in our country. Uh, then a firm called Ambit hired me. Uh, initially, we were hired to build the institutional broking business, then the wealth management and then the asset management business. That's where I wrote Coffee Can Investing, Unusual Billionaires. I spent nine years working in Ambit. It was a lot of fun. We built three very profitable businesses. Proud to so that they're still very profitable. Uh, it's been six years since I left Ambit. Those businesses are still making money out of this. And in 2018, I decided that I turned 40 then, uh, 41, actually. I turned 41 and I said, it's now whenever I want to set up by myself. So August 2018 is when we set shop. Um, took us three, four months to get a license. And originally the plan was to manage $100 million for friends and family, you know, perhaps make a million dollars or so in performance fees and have a nice, comfortable suburban life. But uh by then the books had become very popular. Uh Sal mentioned Diamonds in the Dust, he published that subsequently. That also became a bestseller. Uh, we discovered in 2020 that we could do something called podcasts. Till 2020, I've never seen a podcast in my life. Uh, during COVID, we discovered something called podcasts. India discovered uh social media and YouTube, and the combination of books and podcasts uh took us uh from you know from our aspiration of $100 million, it took us about a billion dollars. And um we ended up managing a mixture of local money and institutional money from from the Western world. So that's where we are. It's been it's been a lot of fun living in India. Um it's never it's never a dull moment. Plus, uh Larry Kazan adding to the excitement. Can't complain. We just don't get five hours to sleep at night. And we're very grateful that we get those five hours. But other than that, it's uh it's been a lot of fun living in this country, working in this country.

SPEAKER_05 13:44

That's great. Um thank you. Thank you for sharing that that backdrop. So tell us about um the process of saying, oh, well, if it's now or never, so I'm going to start my own firm. Um, how you went about uh doing that, thinking about that, and then who you partnered with and and what that process was to get that up and running and and thriving.

SPEAKER_03 14:07

So look in retrospect, I can make it sound fairly rational and logical. Um I always like to tell people that the way I did it was I I had a broad estimate of the probability of success multiplied by the payoff for success minus the probability of failure and the downside from failure. And I'd like to believe that that was a net positive number. Um so, but in summer, in the summer of 2018, when my wife and I were doing the maths on this, it was whilst the it was an EV plus bet, it was a net positive bet. Uh, it was also nerve-wracking, right? Children were entering their early teens. Uh, you know, we would have to save up for their university education. Um, and also I didn't have a great deal of money. I had roughly a million dollars to invest. And whilst that sounds like a lot of money, perhaps in some other countries, in India of that million dollars, you need to put half of it up as red cap. So if I put half of the million dollars up as red cap, that didn't leave that much cash burn for us to do this on. So it was nerve-wracking, not because I was not worried about the future viability of the business, but I was worried as to whether I had enough money to make this work out. So I uh reached out to a few people that I knew in the city and I said to them, well, look, we want to build this business. I need a strong guy in compliance, a strong guy in technology, I need strong fund managers, I need good analysts. Um uh uh and and there's probably seven people that I needed sales, sales, tech, compliance, uh, HR, management and research. And I reached out to the best people I could, right? So this definitely do the Avengers type thing. And I remember I assembled all the Avengers in an office in Midtown Bombay, and I said, This is what we want to do, uh, this is the future, got them all worked up, and then I said, just one small problem, boys and girls. Uh, we have no money uh to do this with. Right? So the starting silence guru, and then I beamed up a stat sheet. I said, Look, here's the stat sheet. Uh, here's your current pay. Here's what I think is fair fair value for you, fair value for you in the Indian job market. And if you guys agree to work two years without pay, uh I'll translate that in front of you into a stake in the firm. And we'll build a firm where at the get-go, we'll have a hefty stake. Uh, I'll put my money in. I'm not asking you to put money in. Whatever salary you sacrifice, whatever salary you sacrifice will become a stake in the firm. And um we did that and it worked out. For exactly two years, we didn't pay salaries, and on the 25th month, we started paying people properly. But those founders, the seven founders, ended up owning a big chunk of Marcellus. And thankfully, that's worth a lot of money today. But that's how that's how we got going. That's the origin story. It's raw estimate. Whilst I did the math on probability of success, I only had a million dollars and I had to build a business with a million dollars. I needed top talent. And at the outset, I got them into the room, gave them perfect clarity on what the odds were, and said that if you give up your salary, some of them needed a little bit of money to get by and completely understandable. So from that, from my million dollars, we cut out salary checks. But uh, those guys put their backs into it. Uh, we were lucky as well, we were extremely lucky with the that the post-COVID, post-COVID Euphoria was good for our portfolio. And I think 2018, 19, 20, 21, for four years we're great numbers which allowed the which brought the AUM in and allowed us to not just pay salaries but build a larger business. And so what's the scale of the business now? And how did how how did it we peaked at a billion odd at the moment? We are at 700 million dollars odd. Okay. Um, we underperformed through 2022 and 23, and through 24 and 25 performances kicked up again. We're going to see the underperformance for uh 18 months starting in Jan 22, which was the summer of 23. That underperformance resulted in outclosed. So from a peak of a billion, we're down to 700 billion. Got it. And and what's your fee structure to investors? So we offer clients a choice. Uh they can either pay us a fixed fee of if they are in India, uh, roughly 2%, if they're investing world one and a half percent. They can either pay us a fixed fee or we work on a performance fee basis, where the fixed fee is a zero can, and we take 20% of the upside in excess of a hurdle of excess of a hurdle of six percent. So so interestingly, as you would imagine, most people choose the zero fixty, uh-huh, zero fixed free construct. And that means uh in years where we beat the benchmark. And usually when we beat the benchmark, we beat it by a country mile, we end up making a lot of money. So effectively we're taking the risk on ourselves. We're taking risk on ourselves and we end up earning a little bit more than the two percent because we take risks on ourselves. So there are years where we earn very little money because the performances don't come through, but then there are years where we we make many tens of millions of dollars and just make up for the bad years. And from the day we created the firm, we created a policy that we'll keep on the balance sheet at all times two years of operating expenses. So by and large, it's fairly fluctual with our expenses in the in our offices. So we've been end up close tracking now, three years of operating expenses on the balance sheet, and that that allows us to offer more people, yeah, uh the zero fixed fee structure. But our original the earliest cohort of clients have figured this out. The earliest cohort are increasingly toggled away from performance fees to fixed fees, and that's only fair, right? Once you understand how we have done the maths, and once once the client understands that, we will end up making more money to performance fees, uh, entirely within the rights to fix or completely fixed.

SPEAKER_05 19:55

Are most of your clients institutional clients from outside India or or how is that?

SPEAKER_03 20:00

Yes, in India, in India, we don't really have institutional clients. We have only one institutional client in India, which is the Indian Navy's pension fund, right? And I think we probably have a couple of other corporate uh treasuries, but India, as yet in India, the institutional asset management business hasn't yet been born. It's Indian pension funds don't give bandates to Indian fundhouses. Uh, the government of India doesn't either, the Indian Navy being a rare example, rare exceptions. Uh outside India, most of our clients are institutions in the in Europe and North America, it's pension funds, churches, universities, and so on.

SPEAKER_05 20:35

I see. Okay, that's that's very helpful. So, how um you know what I loved about what you said, and it's part of the reason we have Capital Alliance, is that I think there's a lot of people who don't start a business thinking about scaling a business and thinking about bringing in the best people and creating systems and processes. And it sounds like you started that way from day one, which which is extremely rare from what I've seen.

SPEAKER_03 21:01

Um so part of it was I'd run a large business before. Sabit was a very large, successful brokerage asset manager, land manager. And rightly or wrongly, I had seen that if you want to scale in India, this as I've as I'm sure many people listening to this know, India has a fairly evolved regulatory structure. Uh, we also have multiple regulators as the Securities and Exchange Board of India, but if you run a business like ours, you also have to contend with the Reserve Bank of India, it's obviously the government of India's rules and regs. And I'd realize that if you build a business which is, say, uh uh tens of millions of dollars in revenue in India, you have to interface proactively with multiple regulators, keep them on site. And it's very difficult to do that as a sole proprietor. Unless you have strong people in compliance, in finance, in technology. It's not just good enough to say I'll have a few great analysts and good fund managers. The support functions have to be world class. And I saw that and I learned. The hard way, not the seeding job.

SPEAKER_05 22:02

Yeah, that makes a tremendous amount of sense. So having taken that approach, which I think a lot of others can learn from, what would you say were the things you got right and the things that you you know, if you look back, you say, hey, I could have maybe tweaked this approach.

SPEAKER_03 22:18

Yeah, I think let me start with the things we got wrong, right? We had we had ne we had never anticipated in our wildest dreams that the first three and a half years we'll have this sort of blockbuster performance. I think we beat the index by 700 bips in the first three and a half years. The money literally flowed in, tens of millions of dollars would flow in every month. And I remember for the first three years, I would just try to deal with people's emotional breakdowns as they would deal with overwork. And remember, COVID also hit during that time. So we were sitting at home, my colleagues were sitting at home, uh, the phone was ringing off the hook, uh, various regulatory restrictions were kicking in, people were dealing with their personal traumas with COVID, and we had staff breaking down, just emotionally breaking down, not being able to deal with the pressure. We created us a psychological helpline for overstressed people to turn overstressed uh colleagues to turn to. But in retrospect, I think we burned four or five people out, which we needn't have because of the sheer um volume and intensity with which the money came in. And in retrospect, if I was wiser and if I was a more seasoned uh operator of an asset management house, I would have probably put a uh lid on the inflows uh when the coin was getting so intense, right? Because as it happened, I told you money came in and some of it went went out. So rather than having to go through the emotional trauma of seeing the money come in and then see it go out and burning through good people, had I then wiser, smarter, I would have realized that both the alpha of the fund and the intensity of inflows was suggestive of a peak for our style of investing. I wasn't smart enough to spot that. And then applying that on the investing side can, uh, if I look back, right, 2021 was a year where I think I lost sight of I lost sight of variations because by then we'd like five great years, 17, 18, 19, 20, 21. We had five great years. As I said, we hit a billion dollars. I think we were the fastest firm in India to hit a billion dollars, and and much of that was bungly out of the sitting, sitting in this living room. So I think by 21, in all honesty, looking back two years of COVID while Troller Coast Rider building a company, I think we had lost sight of all sense of reality after sitting in this room for two years. So I lost sight of animations. Um had I had I been building the firm from scratch, had I been wiser, I would have had some outside advisor looking in, saying that look, Sorrup, stop taking money, stop taking money, stop blocking flows, shut the firm to new inflows, look after your staff, tighten up on valuation, tighten up on valuation discipline, sell, sell those companies that have doubled and tripled on you through 2020 and 21. I think had we done all of those things, Ken, we would have probably had an easier time through 22, 23. But uh, I think the great thing about our job is whatever lessons you don't learn yourself, the market teaches you. The market teaches you those lessons in double quick time. And so 22 and 23 were humbling years. The market humbled us. Uh, we learned our lessons, and I think we came out of that in 24 and 24, 25 happened. Much better years for us, sports from our uh from a hygiene, investing hygiene perspective and Trump and giving our staff a more reasonable lifestyle perspective.

SPEAKER_05 25:55

Thank you. I want to call you out for the vulnerability and the openness of that uh of that share. Uh, that's really a lot of what we're trying to create in our community at the Capital Alliance. And I think there's a real power to that, uh, both humility humility and vulnerability and and sharing deep.

SPEAKER_03 26:11

It's interesting you to say that. Thank you for saying that. Um that's very very when you read about other fund management houses, right? Other than say stories like uh other than stories like LTCN, other than books, stories like LTCML and the book that Michael Lewis wrote on them, there aren't too many other sort of battle-field stories where you get to hear where uh uh founder talks about why he wished it scaled slower than pastor. Most of the stories you get to hear is the founder starts out alive, he gets to a trillion dollars super fast, and he becomes a master of the universe, and then perhaps runs for high political office.

unknown 26:49

Right.

SPEAKER_03 26:50

Right? Those are the stories which get seared in your mind. That the fact that there are probably plenty of other founders, uh operators, and asset management who've gone through a similar cycle to mine. I you know I hope that Capital Alliance uh uh allows them to share these stories because I think it's an important learning. Uh otherwise you just go through needless trauma and you put your clients through uh through a relical side.

SPEAKER_05 27:14

Actually, yes, because uh in fact, the reality is that when you see those stories from the outside, that's not the it's probably not the whole truth. It's half the truth. Everybody has struggles and issues. Uh and yeah, so the Capital Lines is a space where we as professional money managers come together and in a spirit of sort of giving and vulnerability, we openly ask for help from each other and we share our best stuff, our best insights, especially the really hard-won ones, which came through mistakes or uh problems that we had to deal with. And we can share it with each other in the hope that it helps other people not having to repeat the same mistakes, you know. Uh I have this thing where I say I'm constantly making mistakes and learning. They're just different mistakes, usually, hopefully.

SPEAKER_03 28:03

I think we all are all making mistakes and learning. That's the only way to grow in life.

SPEAKER_05 28:08

Uh so one more question I want to ask you, and then I'll I'll turn it over to Batsal to ask a few questions. Um, so I know you're you're a prolific author, and you wrote uh quite a few books before Marcellus, and obviously since Marcellus. You talk about how you think about um the, you know, you have a business, every business has to grow through marketing and or sales. Uh so how do you think about the role for professional investors who are, you know, who have outside clients, uh, the role of sort of writing and of writing books specifically, um, and how you leveraged that uh status as an author to grow Marcello's uh when you, you know, from startup to uh to what it is now. If you want to go further back to some of your prior businesses, um, because I guess that was part of your approach there, that that would be great too.

SPEAKER_03 29:04

So I never really I never really set out to be an author uh uh of you know of multiple books. What happened was around 12, 13 years ago, one of the editors of a of a popular business newspaper in India. It's called the Business Standard. One of the editors of the Business Standard came to my office and said that look, you write a column. I used to write a column for a venture uh for a venture capital website called VC Circle. So he said, if you write a column for VC Circle, I've enjoyed reading your column. Uh do you want to write a book? Uh and if you do, then business standard. Uh this newspaper, uh, this newspaper also started publishing up, the publishing half of business standard will go ahead and publish it. And initially I just said, this doesn't make any sense. I've got a full-time day job, how can I write? And then I spent six months, you know, this dwelling through how I wanted to learn more about the trade. And at that time, this is 2012, 2013, I was meeting a succession of portfolio managers in India, fund managers in India, asking them how they had cultivated their investing style, what are the mistakes they had made, in a way, can the kind of the attributive version of capital alliance. I was going from a fund manager to fund manager. After doing uh three, four of those meetings, I said, hang on, if I could record the battlefield stories of these fund managers and with their permission turn it into a book, it'll help the buttons of the world who are coming through. But it'll also help me. It'll quick clarify my thinking. Let's say Shang Jai Bhattacharya's thinking or Shankaran Narain's thinking. Uh uh, if I want to turn it into a polished manuscript, I'll have to ask good questions, cultivate a style of asking questions with illicitive deep answers. So I went back to the business standard and agreed to do the book. That book worked out really well, and that became a bestseller. That led to Tenguin approaching me for the next book. And I said, now why don't I turn the mirror to the corporate side? Let me ask some of India's greatest business founders whether they would be willing to tell me their story. And it turned out they were. Um, and that led to the unusual billionaires. By the time the unusual billionaires had come out, I figured out coffee can investing from the great Rob Kirby, and that led to Coffee Can Investing. And then I realized what was happening, right? The first three books happened because my own desire to learn about, learn about investing, about capital allocation, about corporate strategy. But I realized what was happening was because unlike America, unlike America, India is still a virgin market for investing. 95% of Indian household assets are still in physical assets, gold in real estate. So unlike America, India is still virgin territory when it comes to investing and corporate strategy. I realized that there's a vast market where hardworking, affluent, intelligent Indians want to read about their country. They're happy to read about Warren Buffett, they're happy to read about Bill Ackman, they're happy to read about Blackstone. But as in any country, people want to read about their own country as well, and there wasn't enough content at that time. So we're talking 2017, 2018. And I joined the dots and said, hang on, if I can write newsletters, right, which become a monthly thing, and if those newsletters can then be coalesced into a book once a year, then uh you know I could kill many words that wants to like. I helped the help the Indian public learn about investing, about corporate strategy. I clarify my own my own thinking. And through the newsletter, we also create a vehicle. Through the newsletter, we also create a vehicle which can which can spread the word about our marketing style. So it was only around 2017, 2018 can where the whole thing chales in my head that that I I could serve multiple purposes if I if I was able to publish, say, one good 2,000-word newsletter a month. And I think all of us in our trade end up taking a lot of flights. And there's only so many movies you can watch on a flight, and there's only so many podcasts you can listen to. Um and uh and I started using my flights to write that one good 2,000-word newsletter. And then if you put a few of them together, you get a book, and that's the sort of cycle I've tried to create. It works usually, sometimes it doesn't work. And then uh as the years have gone by, I've tried to deliberately write, I tried to deliberately write, and since you're saying this is not gonna go to my publisher, I deliberately write a book every other year, which shouldn't have any audience. Right? So I write one book on money, on investing, but I write one book on psychology.

unknown 33:38

Right?

SPEAKER_03 33:38

So I interspersed the books on investing in psychology. The psychology books are largely my kind of explores uh my trying to explore different aspects of my mind, of other people's vulnerabilities, length of uh psychological development, healing. Um, and then I interspersed the books on psychology with a book on investing. So that way it keeps me hungry, keen to explore different topics. Uh, it gives me a way to relax on long flights rather than watching movies. And I think it gives the Indian public, and especially the younger generation like Butsa, content because they can get their teeth into and you know, go into the wide world and start becoming investors themselves.

SPEAKER_05 34:19

This podcast is sponsored by the Capital Alliance Mastermind, a private community of asset managers and investors building something real together. Members gather in person a few times a year to tackle the hardest problems in investment management, raising capital, scaling operations, and building relationships that move the needle. What makes it different is the room itself. These are people who share deal flow, make introductions, and hold each other accountable because everyone is committed to giving, not just taking. We're currently building our next cohort. If you manage a fund, join the wait list in the first link in description.

SPEAKER_01 34:54

Um, Sarup, so I think you know, you've you've had a lot of success as a fund manager and you've really um worked across many years in this industry and you've interacted with countless investors and fund managers. So from your experience, um, how do you define a successful money manager? Or what does it take to be a successful money manager?

SPEAKER_03 35:23

So look, there are usual traits, which plenty of other people have spoken about rightly, such as humility, such as hard work, um, uh such as clarity of thought. Right. So those are those are I think I think almost necessary hygiene traits, humility, hard work, clarity of thought. If I if I look back, what I think really distinguishes the legends from the rest of us, and I'm including myself in the in the relatively ordinary category, is uh is the is the ability to utterly insulate yourself from what the world is saying and hold a very differentiated, very uh uh uh uh uh iconoclastic view, almost to the point where the world ridicules you. That's very hard to do. It's very hard to do because human tendency, evolution has made us, made us followers of herd instinct. And what I find that the best investors are able to do is ignore the sort of deep desire to be accepted by the herd, to follow the herd, to do the conventional thing. The best investors are able to almost stand outside the herd, stand at one removed from everybody else, and take a point of view which almost looks bad. Now, courtesy, courtesy, the 2008 Lehman Brothers blow up, and courtesy, big shot. I think Michael Lewis has captured it beautifully. But if you go, just using the big shot as an analogy, if you see the stars of the big shot, the people who were sitting in California and shotting the living daylights out of the mortgage back securities market, none of them were, none of them were conventional Wall Street fund managers, right? And this aspect of being an outsider, you might not be an outsider by social disposition, right? Uh, but you're an outsider psychologically. This aspect intrigues me no end, right? And it's one of the areas that I want to keep digging for as to why is it that some people are able to distance themselves intellectually, psychologically, from everybody else in their play room. They've gone to the same college, they speak the same language, they wear the same clothes, and yet they hold a completely differentiated point of view on an important subject. And even though other people are calling them out saying, you could look at them, what a moron, it doesn't seem to affect them at all. Right? And that I find intensely fascinating. It's one of the most, I think, remarkable aspects of our profession. It's harder to do this in, say, sport. In professional sport, if you if you, as a professional sports manager, manage your team very differently for other people and have a few losses, you get sacked pretty quickly. Right. Um, similarly, in Wall Street, as a CEO, you do something very different and you don't deliver results fast, the board gets rid of you. But in professional fund management, especially in boutique, professional fund management shops, provided you are willing to take the pain, you're willing to take the pain of the consequences that come from underperformance, you're you're a you you can take a differentiated point of view for an extended period of time, and then if it works out for you, it makes you so rich that you don't have to worry about what other people are saying. This aspect of our profession, where if you if you have a very distinctive view about the world, having you have the guts and the courage of your convictions, and you're willing to stand by it, you can be a big winner, but only a certain type of persona is able to pull it off. Right? So if I look back at, say, Pulak Prasad, right? And he's written uh Pulak Prasad has written an outstanding, outstanding book, what I learned from David, right? In this book, he explains how he started out in 2008, how first seven, eight months it was a disaster, he underperformed, fund was underwater. He did a, he, he drew, he asked his investors for more money after the fund was down uh sharply after the Lehman Devakal courtesy, the legal agreement that the investors have signed. They were compelled to give them more money. And then, as as India recovered from Lehman Brothers, Pulak's fund performed. And even to this day, when I meet Pulak, he's one of the most remarkable investors. He might not know the PE multiples of his investing companies, uh, but he knows way more about fund management than most other people because he's approached it with this evolutionary framework in mind that I will buy companies that have stood the test of time, and the Darwinian uh test of time, and I will buy them when everybody else is throwing them out, a crisis like COVID or Lehman Brothers. And then I'll sit on them for years to come, even though others might say, look, companies are underperforming, you should sell it. Um remarkable, right? I might not have the I might not be able to do what he does, but I'm just so keenly interested in understanding the psychological aspect. Why is he able to do it? Why can't lots of other people do it? Like that aspect is I think what really separates the the men from the boys, the women from the girls in our profession.

SPEAKER_01 40:27

Absolutely. And I think similarly, right, like Buffett uh didn't choose to be in New York uh until, of course, he worked for Graham. He went to Omaha or somebody like a Chuck Akri went to Middleburg, Virginia, a village out of like, you know, in the countryside. Swarab, I want to shift gears a little more towards the sales and marketing side of fund management. So you are a student of psychology, it deeply interests you. Can you talk us, uh, can you talk to us a little bit about how do you how do you view the the consumer of a PMS product or the consumer of um or the customers of a fund manager? Like what do you think is in their heads in terms of when they give you money, what are their expectations, what are they thinking, and how do you approach sales from that perspective?

SPEAKER_03 41:19

Yeah, so I think there's three things we've tried to keep in mind wherever we have sort of forgotten these three three things when we go marketing, I think it has cost us dearly. The first is most people, especially affluent people, don't have much time. So they might give you a one-hour video call or a one-hour meeting, but effectively you only have 20 minutes. After 20 minutes, if you haven't got into their minds, the rest of the meeting is we call it in India time pass. So uh again, time pass in India is sort of as the name suggests, you're just going through the motions, right? So so therefore you have whatever you want to, whatever impression you want to make, whether it's a podcast, whether you are giving a video call or a face-to-face meeting, it's 20 minutes, right? In that 20 minutes, if you want to think of it in PowerPoint terms, you've got five slides maximum. Right? In that five slides, you have to make an impact. If you haven't, you might have the world's best performance numbers, but it might it might not. Your chances of conversion uh suffer. The second is that uh in typically with healthy people, they're not just looking for returns, they're also looking for something that they can go and tell the relatives, their friends, and gain social acceptability. So this was one of the gaps I spotted when I set up Marcelus, right? So in India, uh in India, can we have a bike called Royal Enfield? It's our equivalent of Harley Davidson, right? And uh, in spite of President Trump getting tariffs on Harley Davidson removed, I hope Royal Enfield continues to do well because I'm a shareholder in it, right? But what really struck me about Royal Enfield uh was that people proudly tell you I am a royal and field owner, right? And Royal Enfield has a thump to its engine when it goes down the street. Everybody knows a royal and field goes down the street. Now, it but for affluent people, it doesn't cost a great deal of money in India. It's 250,000 rupees, which or 150,000 rupees, which in India is a modest sum of money for affluent people. And the run-of-the-mill bikes cost only a third less. But I realized that affluent people love to be seen on a royal feet, whereas they don't want to be seen dead on a run-of-the-mill bike, even though the run-of-the-mill bike is only a fractionally cheaper. And I figured out that the way it's been styled and presented and positioned in people's minds, and I think it's incredibly cleverly positioned by Siddhartha Lal in people's minds, is that this is a class product. Someone of your stature works, some of your stature can. This is the bike you own. The other bike, even if they are the same price as royal energy, the other bike is for the rich app, right? And I said that hang on, that space is open. In our profession, right? In our profession, that space is opened. If you are in a cocktail party in South Bombe, do you really want to say that I have a fund from the local high street bank? Or do you want to say I have a fund uh I have a portfolio from run by Marcellus? So I figured this second piece out that there is a social cachet that in America arrived probably 10 years ago, but only the last five, six years it arrived in India. And I guess we are reasonably early to latch on to that. So 20 minutes, social cachet. And the third piece is the product itself has to have a narrative. So this piece I learned from my days with John, right? So John had taught me very early on. John had taught me, sell the features, not the product. So I asked her, What do you mean, John? She says, Well, if you're selling a washing machine, do you really want to really want to tell the customer this is the size of the cylinder, this is the prospect's glass, this is the electricity, this is the circuitry. Customer is not interested. What the customer wants to know is this will uh wash your clothes to a greater level of whiteness in 15 minutes. It's environmentally friendly, it'll save you electricity, and you can operate it with remote control from your office. That's something like that, right? So sell the features, not the product. So we brought that to portfolio management, right? So this is the consistent compounder portfolio. It consists of India's best companies. They have high return on capital, twice the market average. They've compounded at X percent over the last 20 years. Simple, don't get into the next six months, market psychology, macro, uh, your sector rotation strategy, uh how you and your analysts build 55 spreadsheets to identify companies. That sort of thing is important if somebody wants it, they will ask you for it. In those 20 minutes, uh we try to train our salespeople. And in fact, it's before I got onto the call with you on stocking to our sales that's that. Let's sort of keep refreshing the training. Uh, that these are the three facets to fund management. 20 minutes, compact pictures. And if you ask me, when we started off with 20 minutes, now back to social media and reels, reels have made people's attention span smaller, it's probably now perhaps 10 minutes. Um, social acceptance. Uh there's a lovely book by uh by uh by Peter Thien's friend. It's called The Culting of Brands, right? So I I read that early on in Marcellus' uh in existence, The Culting of Brands. Uh uh it's about how do you build a Harley Davidson type brand. It's a motorcycle, but it's not really. It's part of a persona, right? How do you build a brand which becomes a customer's persona? And the last thing, how do you sell, how do you sell the features rather than the product? Uh culting of brands is why I call it Douglas at Kid. Very simple book, but I found it very useful. It uses it's all the case studies and American case studies. Uh, but I I think we've probably perhaps the first people to apply it in after. Uh which is a utility.

SPEAKER_05 47:06

Let me let me ask something. Yeah, um, how how did you, from when you started Marcellus, and maybe you had relationships before, how did you identify sort of uh potential clients who you could reach out to and cultivate the relationship?

SPEAKER_03 47:21

Yeah, it's very interesting. So I feel to friends and family, right? It's sort of this naive hope that they'll all give me a little bit of money. Some did care, some can't did, but most didn't. And most didn't. Um then uh uh one of India's most famous venture capitalists, Sanjeev Bhikkchandani. I he I met him and I pitched Germany, known Sanjeev for many years. He's he's celebrated VC, he's he's founded a company called Info Havia and our shareholders. He also went to my school, so I met him and I said, Look, this is what I'm doing. So Sanjeev said, You write books, don't you? I said, Yes. He said, Do you put your email address at the back of the book? I said, uh no. He said, Why don't you put your email address at the back of the book? People like the book, they will email you, and you can get some business. I said, Okay, thank you. And I went off and did that. Um, and I said, and Sanjeev got predicted, people started calling up to write the book, we like the book, how do we invest? Then uh uh I met him a year later and he said, you know, so and so the Indian equivalent of CNBC and so-and-so channels, the England equivalent of CNBC, my friend comes. He's uh he's uh just a local, he's a local stockbroker, he's not a he's not a fund manager, but he explains stocks in in the vernacular in Hindi in such a way that the fellow uh driving auturiksha, driving a tuk tuk can understand that this is the stock to buy. So why don't you do that? And then at that time I was still a just come out of an investment bank and I fancied myself as catering only to the elite. So you know I swallowed my pride and I started doing at that time conference calls and subsequently to gain uh webinars, and I kept this image in mind of Sanjeev's friend speaking on a Hindi channel on CNBC type Hindi and explaining what stocks to buy, but in a language that the Viksha driver would understand. And that combination of writing books and putting our address at the email address at the end of it and doing podcasts, simplifying investing for people, that's how most of the business came in. My friends and family gave us a little bit of money to get us going. But the real impetus came from, uh I think, as what's the said, from democratizing, democratizing investing in India. Um, it brings within its pros and cons. And as soon as as soon as the democratization started, I realized that that uh just as uh just as we are just as we are sort of popularizing investments, whatever mistakes we make will be amplified, and we'll have to live with the consequences of that. And some of that we've lived with in 22, 23, and 24. But that's fair game. I think if you're using a choosing a certain medium through which to go out and tell the story, and the medium works. Uh believe it or not, we've never gone marketing to America, right, when the American phone calls started coming in. In fact, just as I knew nothing about asset management 20 years ago, I actually knew nothing about endowments. But I sort of knew about them in the abstract. I'd read about them in LTCM and various books, but I'd never gone pitching COVID and interrupting. During COVID, the American institution started calling out. And we had to learn a very different style of explaining investing on Zoom calls through 2020 through 2020, 21 and 22. And it was only in 22 summer, four years after Marcellus had been created, that I went to uh uh uh uh Europe and America for the first time to meet institutions. And then gradually what we realized was we need to separate the firm. The high net worth and retail piece was separated out, and the institutional piece was separated out because the communication is very different to the two different parts, to the two different audiences. Makes sense.

SPEAKER_05 51:24

Um can you talk about the differences of setting up and running an asset management operation in India versus the US? Pros and cons. And um if if you know, and also uh let's talk about the Indian markets a bit, what what's interesting about them or or not, uh good or bad.

SPEAKER_03 51:42

Look, I haven't run an asset management business in America. I've seen other people do so. And I've run an investment advisory business in the UK. Uh so basically whatever I've seen in America, seen of American asset managers and my Librix feelings in the UK. I think three big differences are because those are more mature markets for investing, because those are more mature markets for investing, uh, the amount of legwork you have to do in communication is less in the Western world. In India, uh simple things like in a company with high ROC deserves a higher valuation than a company with lower value, higher lower ROC, you have to really work hard to explain that. If you tell people, if you tell an Indian high network investor that said company has a higher ROC, sir, and that's why it deserves a high valuation, we just look at even if you're talking gobbledygook. Similarly, if you say Nalhari Markovitz and portfolio diversification, this and these two stocks go together because it reduces the standard deviation of the portfolio. Again, they'll look at you saying, What are you on about? So the legwork you have to do in thinking through how to speak in simple terms. You can't sort of patronize people because these are wealthy, powerful, smart people. You can't patronize them, but at the same time, you have to simplify it. Otherwise, that 20 minutes of window that you get pitched is gone. Right? So a lot of what the economist, kind of the economist style of writing, the economist style of speaking, we have to learn a lot of that over here. The second big difference is in your country in the West, the the regulatory construct is a given. In our country, we have to work very hard to go to the regulator and say, look, Mr. Regulator, we need these three, four, five rules to simplify the process of investments. For example, until uh my colleague, my industry uh counterparts and I created the trade body for our industry, uh, uh pen and paper, physical pen and paper sign up was mandatory for our industry.

unknown 53:47

Right?

SPEAKER_03 53:47

We have to go to the regulator and say, hang on, why can't we sign clients up online like this? And rather than pen and paper, can't they type on the screen that they have read and understood the terms and conditions and they're happy with it and so on, full stop. Right? Um so the regulatory construct that Americans take as a given, we in India uh have worked, is still working, by the way, to get that laid down so that uh the the the playing field is even rather than rather than the playing field having stones and boulders on it. And the third aspect is the scheme. Right? Already already India has 200 million retail investors. I think America has what 300 million people, right? India has 200 million retail investors, Ken. And we're just getting started out in India, right? Uh 95% of wealth is still in physical assets. I reckon Indian physical assets are $10 trillion. So as physical assets port from physical to financial, uh, this is already the world's fifth largest market. It'll probably a decade hence be the second largest market in the world. But the scale is colossal. The numbers we deal with, right? Um uh at our at our peak, we were signing up uh 100 clients a day, um, and they were giving us roughly $10 million a day.

unknown 55:06

Right?

SPEAKER_03 55:06

So that sort of scale uh for a small firm is hard to take. Um so I think India will scale over the next 10 years again, but the numbers are vast. Thankfully, this is a tech-savvy country. Uh but small firms like us have to have to invest in tech very early to be able to deal with scale. So I think those are the three big differences. The communication is easier in your part of the world because both sides are used to the discourse. The regulatory construct is stabilized in your part of the world, and the scale is more modest. You know, the scale is colossal.

SPEAKER_01 55:45

Sorab, um one question I wanted to ask again. You know, a lot of the people who are watching the podcast are people who aspire to be money managers who are or who are already established money managers. Um, and and given that you are a proponent of long-term investing, how do you manage long-term investing with short-term client expectations? You know, how do you manage clients who are breathing down your neck or or you know, during drawdowns or market crises, they are they're bringing your phones. How do you manage these two sides of the coin?

SPEAKER_03 56:18

So this was the piece that we had to learn the hard way through 2022 and 23, Watsan. The first four years was easy because portfolio was doing well and everybody was happy. And we could say we were doing long-term investing, and the client said, keep doing it, it's just working out really well for everybody, right? And 22, 23, the same style backfire. And obviously, people said, My God, you've lost me a ton of money. What are you gonna do about it? Um, so 23 was the year we re-retooled ourselves. Uh and the retooling basically meant that we said that rather than position size, just simplifying uh 23 and the retooling and 23, simplification was rather than just basing position sizing and investing on the on the back of EPS growth. Till 23, our North Star was EPS growth. The greater the EPS growth for the company, the bigger our position size. So in 23, we said rather than position sizing just basis EPS growth, we will position size basis IRR. And how do we get to IRR? To keep it simple, IRR is uh uh uh EPS growth plus whatever dividend deal the company is giving, uh, minus whatever we expect the valuation over the next five years. Right? And and and if uh if a company like HDFC Bank had already corrected, then the EPS growth and the IR would be broadly similar. And if a company like Trend has had a stellar run, we can still be very bullish on the EPS growth, but we expect a degree of mean reversion in the valuation, and therefore the IRR expectations would be duly modulated. Uh, that construct, which we implemented in 2023, has worked us really, we've served us really well over the last couple of years. It's helped us beat the benchmark. More importantly, when a client calls and says, What are you guys doing in this market correction? As you probably are, all of you are both of you are aware that since September last the Indian markets were correcting, we've been able to say that in our small and mid-cap portfolios, we're sitting on 30% cash because the valuations are egregious, the market is too expensive, the economy is cooling down, and we're keeping an eye on high-quality stocks as the valuations tank. Um we will be moving our cash back into XTs again. But for the for the moment, basis our our valuation discipline, this is the reversion to be invaluations. We believe this is the right time to set up cash. So the communication pieces become easier. But I think more than the more important than the communication pieces is our own discipline on taking money off the table has come to the fore, especially since August last year, when we realized that the market economy was tanking and valuations were somewhere in the stratosphere.

SPEAKER_05 58:56

Yeah, one um so one question I want to touch on uh as we get towards the end of the episode is um, I mean, I'm more global in my mindset. Really, most of my assets and focus is on America, and my clients are here as well. But if somebody is a um US investor or perhaps a European investor, uh, and they're trying to think about where to allocate their funds, where where does India fit into the pantheon of options? What would be your how would you sort of handicap India versus other opportunities that we have? Continue to invest in America, invest in Asia, invest in Europe, invest in um you know South America or Africa or wherever. How do you think about that question?

SPEAKER_03 59:46

To look at the context of emerging markets, and we've been saying this for many years, long before the Trump China, the Trump-China punch up. The context of emerging markets, if we look at the data over 10 years, 20 years, 30 years can, India stands head in shoulders above any other emerging market. Uh dollar returns over 20 years, I think at 10 and a half, I think only the only market in the world emerged or emerging amongst the large markets. The only market which has matched India shoulder to shoulder for returns over 10 and 20 years is the United States, right? No other emerging market is even in the same ballpark as India. Now, now, why has India been able to keep the leading daylights out of all other markets, all other emerging markets, and all other emerged markets car in America? I think there's a lot to be said for free market democracies. Free market democracies are noisy, they look messy and ugly from outside, but they deliver because there are two things which are very important. They have contestability of political power. If the guy running the country screws up, he gets voted out in a free market democracy. In a country like China or Russia, it's a very different reality. Secondly, free market democracies have contestability of the economy itself. So if the company screws up, they lose their place in the market, somebody else takes over. So there's a natural, there's two levels of fitness, there's two levels of Darwinian fitness embedded in free market democracies, which is why the world's two largest free market democracies have been on the leaderboard, number one and number two. United States and India, but number one and number two on the leaderboard. So on that basis, I've long believed that the allocation that global allocators give to India is ridiculously low. I know they do some MSCI business and they justify the low allocations in the back of that. But for many years now, when I go to America and I ask someone how much have they allocated to America, say $300 million, and then ask them how much is allocated to India, well, we don't have an India allocation. They say, Well, why don't you have an Indian allocation, right? And part of me almost feels like asking them, how do you justify your job if you don't have an India allocation? You're sitting here allocated to China for 10 years. Yeah, if you open a Bloomberg terminal, look at Chinese free cash flows, Chinese ROCs, Chinese compounding, Indian free cash flows, Indian ROCs, and Indian compounding, is an item day difference. Uh, all of that being said, as I said through last year, through August last year, August September to the current day, we told Western allocators that don't allocate more to India at the moment. India is richly valued, the economy is tanting. Wait for the valuations to come off. Uh, I think we are a little more than halfway through the valuation correction in India again. I think there's a little bit more to go. I think large caps are still 10% overvalued. I think small caps in India are 30, 40% overvalued. But uh I think that correction will come, and when that correction comes, I hope values who are watching. They'll be loading up on India because otherwise, to have a bigger allocation to China than India makes no rational sense. Whether you look at cash flows, broke ease, tenure compounding, EPS growth, underlying economic fundamentals. Um these sorts of valuation windows where India tax India comes off 20-25% in a year, they've come along once a decade. Uh when you get those windows, it's it's a great tactile loader for India.

SPEAKER_05 1:03:05

Interesting that you said the large caps are actually more reasonably valued than the small caps. I would think more of the activity is in the large cap, so why wouldn't it be the opposite?

SPEAKER_03 1:03:17

No, I think the retail investor in India has gone berserk on small caps. Okay. So through COVID, through COVID, people spent two years sitting at home, uh filming on their brokerage apps. By the end of those two years, they were utterly hooked to putting money into small caps. There's very little underlying liquidity. Any of the small caps, say the say 500th or 550th stock in India by market cap rank in, it fade $100,000 a day. So if you're getting uh uh say $100,000 every hour going into those stocks, those stocks will run up 60, 70, 80 percent, right, in the course of two, three years. And everybody who's invest will get a sugar rush. They'll put more money. They'll go to the bank and borrow money and put money. So that's happened. Uh uh September last year, it started unraveling. Uh-huh. I think we're only halfway through the unraveling. It's gone in mid-cap that is. There's plenty of still plenty of illiquid, uh small caps with weak fundamentals trading at 30, 40, 50 times earnings. I think that will get corrected in the next six months. And in large gaps, I think another 10% will be at sensible levels. Um I suspect the valuation bottoming out will happen before the economy bottoms up. Might take the economy another year to bottom out, uh, but the valuation bottoming out and my my reading is happening before that. So these windows come along every decade. Once a decade, either a Lehman type event in your part of the world or something back in our part of the world causes a cratering of valuations. That's when the retail investor flows in the town. When the retail investor flows in the town is the best time for its institutional allocators to put money to the last two questions on my end.

SPEAKER_05 1:05:02

Um, what do you see India looking like in say 10 years or 15 or 20 years relative to the West?

SPEAKER_03 1:05:11

So my reading is the the government of India gradually will ease capital account convertibility, which means they'll allow Indians to invest freely abroad. So at the moment, the government puts a restriction on us, uh on Indians, those living in India, we cannot we're only allowed to invest $50,000 per annum abroad, right? Um, but I think those restrictions will go. As capital account convertibility comes in, we can freely invest abroad. I think the rupee will get, the rupee will devalue, we will get cheaper. As the rupee gets cheaper, Indian exporters will become far more competitive. We have good beyond IT and Pharma, IT and Pharma in the sectors India is known for. Beyond IT and Pharma, we have a fairly competent, high quality manufacturing setup, but they are handicapped by an overvalued exchange rate. If we introduce Capital account convertibility, our exchange rate will devalue, our exporters will become more competitive. And the third thing is I think we will see that massive amount of physical assets, real estate and gold, right? $10 trillion a thing. I reckon if we speak to each other a decade hence, I think another couple of trillion of that easily will be in the stock market. Stock market today is around $3.5 trillion. Decade hence, I'd be surprised beyond the $10 trillion.

SPEAKER_05 1:06:27

And just related to that, if the rupee will devalue more so than previously because of capital account convertibility, won't that be a headwind to dollar investors?

SPEAKER_03 1:06:38

So it will be, but I think it'll be more than made up by more than made up by underlying EPS compounding. So if you look at the 50 since 91, the rupee is given up around 3% of its value each year since 91. Yet in dollar terms, America and India are reasonably similar, 10, 10, 10, 11% dollar returns, total shareholder returns over 20 years, right? Now seems to the rupee rather than giving up three, it gives up five. I think we'll be more than able to make it up, especially given what's playing out between America and China. I think we'll be able to make it up on the export side. Competitive exchange rate will help us deal with imports coming in from China. It'll help us be more competitive in exporting our stuff into the Western world. It'll also mean an easier monetary policy energy, right? Usually, if a currency goes down or foreign money comes in, it's an easier monetary policy energy. That will help drag down local cost of capital. So I think uh uh people like me are going to carry on canvassing for this, right? We are we are we are whoever we are, we whatever we might say, might be ignored by the powers that be. But I think many people like me are knocking on the doors saying, can we please have lower interest rates, more liquidity in the financial system, and an easier exchange rate regime so that we're able to become more competitive in the global market for also products and services.

SPEAKER_05 1:07:57

Seems to be an opening with what's going on with China and tariffs anyway. So absolutely, yeah. I think there's an open goal for us. We just have to kick the ball in. And and last thing on India before we ask the last question, uh is um so you know, obviously you're a bottoms-up investor, you're looking at micro factors, ROCE and um earnings growth as your main focus. How about top-down? Like, are there themes that uh if somebody isn't familiar with India you think are are, you know, have have strong uh tailwinds and probably have a long way to go.

SPEAKER_03 1:08:30

So six months ago I published a book economist uh Ananduta. Uh the book is called The Old Televiathan, Unusual Rise of Modern India. In that we highlighted five themes, right? So we call it West Fo. Vesco is the acronym, right? So women, uh, Indian women are now better educated than men. They have more money in the bank than men, and they have more money in the stock market than men. Uh, they are they are the gender on the ascendant in modern India. Uh second is a newly educated elite, right? University education. University education in India is low cost, it's spread far and wide. And for the first time since the country got independence, we're seeing that the majority of successful Indian companies are run by people not from India's elite IITs and IMs or from overseas, run by local graduates. There's a newly educated elite currency. The third theme is southern India. So the southern seven states account for a quarter of India's GDP for half the GDP, uh for a quarter of India's sorry, the southern seven states account for a quarter of the population, half the GDP, and two-thirds of the GDP growth. These states are growing at 8-9%. They've been the fastest growing region in the world for the last 10 years. Good law and order, high quality education, great infrastructure. I think this part of India, southern India, which accounts for two-thirds of our GDP growth, will be the most dynamic region in the world over the next 10 years. Fourth is China plus one, uh, as we discussed, right, as China and America punch up, there'll be room for India to grow manifold in many sectors. And the fifth is outsourcing. RT, when we wrote the book six months ago, was and it's stronger now, that if the if if room for Western companies to outsource manufacturing to China diminishes, Western companies will outsource all their office work to India. Sales, marketing, HR, payroll, uh all of that will end up coming to India. Not just IT, but the whole nine years of light-collar jobs will move to global capability centers in India. So those are five themes in Behold the Leviathan. We've identified the themes given the back through drivers of that, and then try to give some some uh some sense of why how this theme will play out in the next three, four years. Right. And that's a book that you gave us. And uh that's a book yeah, we are.

SPEAKER_05 1:10:47

I hope you you managed to sort of fall asleep on the flight reading the book. I I read it, and uh I that's why I actually asked the question. Thank you so much. And I recommend the book to anyone interested in India or just investing in general. Uh, last question. Uh so we obviously we're creating the Capital Alliance, the Capital Alliance podcast is related to that. And it's a group for money managers. And one of the insights that we had, which I'd love your your thoughts on, is that in a world which is increasingly connected technologically, there's it's less and less easy to find community and to find true connection. Um, and so that's why we're actually creating this sort of network of a very selective network of the greatest people around the world who are committed to transparency and vulnerability and humility and coming together uh multiple times a year. Um so just yeah, I just wanted your thoughts on sort of as your career has progressed, where do you find community and and like-minded um people who are interested in the similar things? Um and what do you what do you think of uh the importance of community in professional and personal um growth?

SPEAKER_03 1:12:02

Kudos to you for building this because you know I I I at least I hadn't heard of any similar setup globally till you till you till Vatsal and you highlighted highlighted this to me. We've tried to create something similar in India, the Association of Portfolio Managers in India. But that's more of a trade body, Ken. It's more of a trade body than than a kind of space where we can be vulnerable with each other. And because of the needs of the Indian regulator, uh PMI ACME, as we call it, API's become very active, but it's full of you know performance, performance standards, key WRR, XIRR, fees, and so on. So we haven't yet been able to cultivate the shared space for sharing insights, emotions, and vulnerability. Um I think what you've created is is uh is uh is powerful. Uh I hope that it does very well. And whatever I can do to you know give you guys some support in India, let me know because I think we need more of this. Um many years ago, right, when I was building Clear Capital, a really bright young guy came and interned with Cambridge, Cambridge graduate. He came and interned with me. Uh I thought he was 21, 22, full of energy, full of full of spark and life. Um I then migrated to India, as I said, in 2008. And I read about him. He became a star fund manager by 2017, 2018, he was a star fund manager for a famous fund house in the UK. Then COVID struck, COVID struck in, and his fund underperformed in the first three, four months of COVID, it underperformed pretty badly. For a star young fund manager, that was his first period of underperformance, right? And you know, just imagine, right? This I was 32, 33 years old, bright kid, oxbridge education, the world at his footsteps, earning God knows how many million dollars a year. But he couldn't deal with our underperformance, right? And um then one day I woke up in the summer of 21 and I read in the British newspapers online that uh he had walked out of his house late at night, walked into the local lake, and he was never seen off again until the cops found his uh body here a couple of weeks later. That's the challenge of our profession. It looks seductively glamorous from outside, but the pressures of it are intense. And the whole world is looking, and you feel when you make when you go through phases like that, young fund manager goes to a phase like that, sitting at home with our performance, you tend to believe that this is the end of the world. I think for many reasons, uh uh for many reasons I think what you're building is valuable. Not least, it'll give all of us a place to go and share our battlefield stories.

SPEAKER_05 1:14:41

Yes, thank you. Thank you for sharing that. There's actually a few other stories I won't share them of quite prominent people much later in their career uh in this business who who uh succumbed to really tough depression, other other um, you know, obviously, they're obviously mental disorders as well. And it's obviously always uh tragic to to hear of somebody who had everything in their fingertips and yet um kind of lost the plot, unfortunately.

SPEAKER_03 1:15:08

Um thanks for doing this. Thanks to Building Capital Alliance, all part you guys. Let me know how I can help. And uh thank you for hosting me.

SPEAKER_05 1:15:15

Thank you. Thanks for watching this episode. Go check out our conversations with Peter Sliggers and got them bid. Links are on screen. And if you're a fund manager, join the Capital Alliance waiting list below.