Malabar Investments Indian Small & Mid-Cap Manager
|Share Classes (by commitment):||A1 (Rs 1 cr to Rs 5cr); A2 (Rs 5 cr to Rs 20 cr); A3 (Above Rs 20 cr)|
|Preferred Rate of Return:||10% post-tax IRR compounded|
|Investment DrawDown:||In 2 to 3 tranches over 6 to 9 months|
|Lock-In Period:||24 months from the date of last investment|
|Number of holdings:||20 to 25 (with the top 10 holdings accounting for at least 70% of the allocation)|
|Investment horizon:||Investment in high-quality business with at least a 3 to 5-year outlook|
Investment Philosophy and Approach
We invest in well-run, moderately priced firms with deep and wide moats surrounding them, resulting in stable cash flows that can be successfully redeployed to build their businesses over time. We think that by employing this strategy, we may achieve high-rate compounding of returns and long-term outperformance while taking on fewer risks.
Our investment strategy guarantees that the firms we consider have a proven track record of excellent economics and growth. The investment strategy is intended to assess the long-term viability of these factors.
Understanding the underlying growth drivers in great detail, analyzing the depth and longevity of the competitive moat, and determining management’s capabilities and objectives are all part of our due diligence approach. We do thorough due research to achieve this goal, which includes interacting with a variety of stakeholders, including management, rivals, regulators, suppliers, distributors, and retailers, as well as visiting factories, depots, and retail locations.
A significant deal of our work is also spent determining if the management team has the motivation and capability to take the company to a level that is several times higher than it is now.
MALABAR MIDCAP FUND
Over the next 3 to 5 years, generate higher profits by investing in a focused portfolio of firms that can expand their earnings at a 20%+ CAGR over the fund’s lifetime.
Listed enterprises with a market capitalization of more than INR 5,000 crore and private companies with a market capitalization of more than INR 5,000 crore in the next two years Due to our target market capitalizations, the portfolio will comprise a mix of bigger small and midcap firms.
A cash-generating, return-on-capital-focused investing strategy that emphasizes buying at a discount to intrinsic value.
Typical portfolio company
A company that is a market leader in a growing area, is effectively managed and is well positioned to dramatically scale up.
What do we avoid?
Enterprises that need a lot of capital, sectors with little distinction between participants, industries with a lot of government engagement, and very esoteric businesses that the team doesn’t understand
Focused Portfolio: We think that for creating significant long-term returns, a concentrated approach to portfolio management is necessary.
- We can do a high level of on-the-ground investigation on the firms and management teams since we invest in a smaller number of them.
- After 15 securities, the benefits of diversification begin to erode.
- Having big allocations to your highest conviction ideas can help you generate long-term alpha.
Key Levers used in Position Sizing
- The business’s moat’s long-term viability
- The management team’s quality
- Runway for growth
- Variability in growth outcomes
- Incremental return on incremental capital employed
At the firm level (asset-liability matching), portfolio level (exposure to single securities, sector), and business level, the risk management framework handles important risks (mistakes). Our procedures are in place to guarantee that we stick to our investment strategy, which is to invest in well-run, high-quality companies at fair prices.
- While we are continuously raising funds and expanding the portfolio, they expect some lag in returns relative to the broader markets.
- As of December 31, 2021, asset-weighted returns for the Fund (IRR based on actual cash inflows and current gross value of the Fund) are 28.8%, compared to 22.6 per cent CAGR returns for the NIFTY Midcap Index.
- Given the constant inflows, the Fund’s average cash allocation over the previous two years has been 15%.
- Furthermore, throughout the previous two years, the Fund has had an average allocation of 11% to private assets, which are normally priced at cost.
- As a result, over the previous two years, 24 per cent of the portfolio was kept in cash or private instruments.
About Malabar Investments
Malabar Investments is a major India-focused investment business that was established in 2008 with the support of reputable institutional value investors from the United States and Asia. Malabar is recognized for producing wealth through careful, long-term investments, and it has a focused portfolio of high-quality firms. The research and investment team, which consists of six members, has total expertise of over 60 years, with each team member displaying a love for value investing.
Malabar focuses on discovering small to mid-sized businesses that are market leaders, have a sustained competitive advantage, have shown pricing power, and have a long runway to financially develop. These businesses have high return ratios, solid cash flows, strong balance sheets, and are managed well. Malabar invests in such great firms as value investors when their valuation is less than their cautious assessment of their real worth.
Malabar conducts in-depth proprietary research, maintains a focused portfolio, and invests for the long term. Their investing philosophy demonstrates their unwavering dedication to intellectual honesty, logic, integrity, and brilliance.
Since 2016, Malabar has been registered as a reporting manager with the Securities and Exchange Commission (‘SEC’). SEBI regulates both the FPI and the AIF side of our funds. The business has instilled a strong compliance culture among its employees, which is guided by the “investor comes first” principle.
Malabar is a UNPRI signatory as well (United Nations Principles of Responsible Investment). Our investing methodology is based on ESG principles, and we formalized our commitment to these values by signing the UNPRI in early 2020.
WHY SMALL AND MIDCAPS
Inefficient space: Compared to big caps, small and midcaps are still being investigated and have a smaller institutional presence. This inefficiently fills an area where the relationship between quality and values frequently breaks down.
Information asymmetry: Given the absence of quality research, there is a lot of information and analytical imbalance that may be leveraged by a high level of on-the-ground scrutiny of firms and promoters.
Higher profits growth potential: Small and midsized businesses may achieve higher levels of growth from a lower starting point and maintain them over time. This has been observed in both established and emerging markets, where small and midcap stocks have thrived in the long run.
A large investment universe: There are around 320 firms with market capitalizations ranging from INR 5,000 to INR 30,000 crores, as well as another 250 companies with market capitalizations above INR 2,000 crores that the fund might consider adding in the future.
New economy firms: This market category is experiencing an influx of new economy enterprises and tech-enabled businesses. Successful enterprises in this market have a huge growth runway that can be leveraged with minimal capital.
While big caps have continued to rise over the previous four years (with the exception of March 20), small and midcaps saw a long-drawn correction from December 2017 to March 2020, plunging over 50% before recovering over the last year.
Small and midcap stocks have historically traded at a lower price to book ratio than large-cap stocks, and the valuation gap has widened slightly in the recent year, notably for midcaps.
Disclaimer: Investing Involves Risk. This document is for information purposes only and should not be viewed as a legal offering document or solicitation. Offers to invest in this fund are made only by the Discretionary Portfolio Management Services Agreement. Past performance does not guarantee future results and there is no assurance that the managed accounts will necessarily achieve their objectives. We do not guarantee any returns in the hand of investors not we take any sort of accountability for the performance of the scheme. The above-mentioned data is collected from the respected Fund house please verify the same at SEBI website.