From 27% to 2%: Marcellus learns to rebalance, diversify and buy dips

After five years of 27% returns, Marcellus Investment Managers’ flagship portfolio delivered just 2% over the next four. The experience taught the team three lessons: rebalance systematically, diversify beyond consumer and financial services, and buy good businesses after sharp corrections, said Saurabh Mukherjea, the firm's founder.

“We may not get every switch right, but getting three out of five right can improve returns, as seen this year compared with 2022-25,” he said.

For instance, Marcellus trimmed Trent after its share price outpaced profit growth, booking substantial gains while retaining a large position. It later built a position in CarTrade after the stock halved from its IPO price, having researched and tracked the business.

Edited excerpts:

What kind of returns should investors expect over the next few years?

The Nifty’s current price-to-earnings (P/E) ratio of around 18 could revert to its long-term average of 15. While earnings prospects have improved after three difficult years, annual earnings-per-share (EPS) growth of 10-11% over the next decade seems realistic. However, valuation normalisation could limit index returns to high single digits, below its 30-year annualised return of 12.5%. Quality stocks, meanwhile, could deliver returns of 15-20%. Rising interest rates, geopolitical uncertainty, household debt and AI-related challenges could create conditions similar to December 2007-January 2014, when the broader market struggled but quality stocks returned 15-20% annually.

What should investors look for?

Look for clean accounts, strong governance, high return on equity (RoE) and good revenue growth. That is what we have been doing. Over the past couple of years, we have tightened the criteria I used to create the classic Coffee Can portfolio in my 2016 book. Earlier, companies needed to deliver 15% RoE for 10 consecutive years and double-digit revenue growth over the same period. For our latest book, The Art of Enduring, we have raised the bar in two ways: companies must sustain 15% RoE for 15 years, and revenue growth must be at least 12%. The third test is earnings-per-share growth of at least 12%.

How many companies actually qualified for this analysis?

We needed at least 25 years of data, which meant only around 370 companies had been listed for that long. Of these, about 50 made it through the initial screening. Remarkably, five of them were from The Unusual Billionaires, which I wrote 10 years ago. I was very pleased that five of the companies I had identified back then had a great run. Many people today believe in these companies.

Which five companies were they?

Asian Paints, Berger Paints, HDFC Bank, Page Industries and Astral Poly Technik. All five still qualified in 2026. The seven stocks featured in my 2016 book, The Unusual Billionaires, compounded at 15.5%, outperforming the market by at least five percentage points. We excluded PSUs, where government-granted monopolies differ from businesses built by entrepreneurs. We also excluded many financial services companies, as rising borrowing costs could make lending harder over the next decade.

For our latest book, The Art of Enduring, we selected five new companies: Bajaj Finance, Titan, Divi’s Laboratories, Dr Lal PathLabs and Tata Elxsi. After screening around 50 companies and excluding PSUs, most lenders and previously covered companies, we had around 10 candidates. For the new book, we focused on B2B franchises to understand how businesses serving large corporations build competitive moats.

When you tightened the filter, what was your thesis on the kind of returns these companies could generate?

Using the revised The Unusual Billionaires filter, long-term returns are around 20%, rising to 26% with the tougher, newer filter. The five companies featured in our new book, The Art of Enduring have delivered roughly 100-fold returns over 20 years. A more realistic measure of the power of these filters is the performance of the seven stocks I wrote about in The Unusual Billionaires 10 years ago. All those have beaten the market, delivering a compound annual growth rate (CAGR) of 15.5%, 5.5 percentage points above the benchmark and about two percentage points ahead of our live CCP portfolio.

Did you hold all these companies in one or more of your portfolios?

Yes, we held them at different stages across our portfolios. As of late October 2026, Dr Lal PathLabs and Bajaj Finance are large holdings in certain portfolios, but we don't currently own Tata Elxsi. Tata Elxsi has fallen around 70% over the past three-and-a-half years since the AI trade began to gain traction. Our research showed it had suffered a roughly 75% drawdown almost once a decade. I'm not saying it has bottomed - we don't own it yet. But great franchises inevitably face major drawdowns. Bajaj Finance, one of India's great compounders, fell 85% between 2006 and 2009 and 65% between January and May 2020. Such companies can suffer drawdowns of 70-90% once a decade, but emerge stronger, not weaker.

But if these stocks fall so much, haven't they already destroyed a lot of wealth?

Take Nvidia, the world's largest company by profits and market capitalisation. Despite being around for 30 years, it has suffered drawdowns of around 80% in each decade. Drawdowns are a feature, not a bug of great compounders. Great companies constantly push their people and businesses to the limits, which naturally leads to rough patches. Our discipline is to buy more when these companies are beaten down. When Bajaj Finance fell 65% between January and May 2020, we doubled our position, and the stock more than doubled over the next 18 months. We've learnt to capitalise on such drawdowns, and I think we can get better at it. A diversified portfolio also helps investors stay calm and provides a hedge against individual stocks or sectors going through difficult periods.

What are the three key learnings that have helped improve performance across your PMS portfolios this year?

Five years of 27% returns for our flagship portfolio were followed by four years of 2%. This led to three key learnings.

First, systematic rebalancing. Despite 18% EPS growth, valuations expanded, with the P/E ratio nearing 50 by Diwali 2021. We have learnt to trim stocks whose share prices outpace earnings and redeploy the money elsewhere.

Second, sector diversification. Our 15-16-stock portfolio was concentrated in consumer and financial services. We have since diversified into internet, pharmaceuticals, healthcare, consumption and paints, while exploring global diversification through a new global team.

Third, valuation discipline. We have learnt to buy good businesses after sharp corrections. For instance, we trimmed Trent after its share price outpaced profit growth, booking substantial gains while retaining a large position. We later built a position in CarTrade after its stock halved from its IPO price, having researched and tracked the business. We may not get every switch right, but getting three out of five right can improve returns, as seen this year compared with 2022-25.

Which company has been a wealth creator or destroyer for you over the past year?

We remain optimistic about Tube Investments, around 60% of whose value comes from CG Power, which has seen a strong turnaround since its acquisition during the Covid period. Its auto-ancillary business is also doing well, though its mobility and EV start-up investments remain challenging. Despite two difficult years, we continue to back its management and capital allocation, hoping these businesses turn around.

We also like CarTrade, backed by experienced management and private equity firms. Its OLX platform has expanded beyond used cars to second-hand products such as cameras and appliances, with Bajaj Finance funding some purchases — a relatively unique offering in India. CarTrade’s core used-car business is a market leader, and 20-25% growth in new-car sales should support used-car volumes. As a low-cost internet platform, higher volumes could boost profits. Despite pressures from jobs, car prices, fuel costs and food inflation, we hope it proves to be a decent investment.

How long do you typically wait for a stock to deliver the expected returns?

Our experience at Marcellus has taught us that even a 20-stock portfolio will have 10-13 dormant stocks at any given time. That’s fine. If everything works simultaneously, it could also stop working together. In a diversified portfolio, some stocks will perform while others remain dormant.

When we bought CarTrade at lower levels, we didn’t expect an immediate rally. Even if returns took another two or three years, that was fine because the portfolio had six or seven themes. A genuinely diversified portfolio will always have a significant share of dormant stocks.