EXECUTIVE SUMMARY
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Dear Fellow Investors,
Crude Oil and Importance of Smart Diversification
At the outset, we are deeply saddened by the human and economic cost of ongoing Middle East conflict. We hope for a swift de-escalation and return to stability in the region.
Turning to investing, due to oil shock from the Middle East conflict, India’s large-cap, mid-cap and small-cap indices are down around 15%, 15% and 20% respectively from their 52-week highs. In our assessment, the market reaction has been driven more by sentiment than by any meaningful change in the long-term fundamentals of Indian businesses. Historically, geopolitical shocks and oil-price spikes have tended to be sharp but temporary in their impact on equity markets. While a small probability of escalation always exists, our base case is that this will remain a temporary dislocation.
To recall, our investment philosophy is to buy a smartly diversified set of quality companies at cheap/reasonable prices. This is a good moment to revisit smart diversification, an important pillar of our investment philosophy:
1. Exposure diversification
Holding 20 companies does not automatically lead to a diversified portfolio. What matters is the diversity of underlying risk exposures. Stock prices and cash flows should not all respond in the same direction to the same external shock. For example, a portfolio with companies across airlines, oil marketing, logistics, chemicals, paints, tyres, plastics, cement and consumer goods may look diversified across sectors, but is actually heavily exposed to crude oil as a single risk factor.
Beyond crude, we continuously evaluate exposures such as: Macro (inflation, interest rates, currency, gold), Geopolitical (war, tariffs, regulatory changes), Technological (AI, cybersecurity) Systemic (credit cycles, capital markets, pandemics) etc.
Another aspect is understanding correlations among the exposures and trying to select negatively correlated exposures – that offset impact of one another- to lower the overall adverse impact.
Understanding these linkages helps ensure the portfolio is not unintentionally concentrated on one external force. Think of portfolio construction like assembling a cricket (or any other sports) team. We want players who perform in different conditions: some excel on flat tracks, some on bouncy ones; some handle pace well, some thrive against spin. Balanced teams and smartly diversified portfolios are able to withstand adversity better.
2. Three-step process
This does not mean that we start with macro exposures and then look for a company. We remain bottom up focusing on quality and price of each company. However, of the two companies that are equally strong and reasonably priced, we pick the one which diversifies portfolio exposures. So, the screening order is:
- Quality companies
- Reasonable price
- Diversity of exposures
3. Cash/ Waiting
Even with a disciplined process, we may misjudge quality, price, or exposure. And often some exposures (like Covid, tariffs etc) cannot be predicted or diversified away entirely.
If exposure to a factor reaches our risk threshold, instead of forcing deployment, it is preferable to hold cash equivalents until the right exposure-adjusted opportunities emerge.
4. Diversification Lowers Volatility
Even if an adverse exposure doesn’t impair long-term fundamentals, it can make the portfolio NAV volatile. Despite hoping that it does not happen, we know that some of you may need to withdraw capital during difficult markets. A less volatile NAV helps lower hit to overall returns of investors redeeming during unfavourable times. Smart diversification is therefore a tool not just for returns, but also for managing liquidity needs.
5. Current Portfolio Exposure to Crude Oil
In our aggregate portfolio, direct exposure to companies adversely and favourably impacted by the current crude shock is approximately 7.6% and 14.0%, respectively. There may be indirect exposures (both positive and negative) which are not easy to quantify. However, we believe the balance is healthy and the risk is manageable.
To summarise, we view the current market decline as a temporary hardship that is creating opportunities after a long time. As the popular commentary is focused on the next few weeks, we need to zoom out and focus on the next 5–10 years. Given the quality of opportunities emerging, we are upgrading our stance to aggressive for the first time in last 6 years, while maintaining quality-price-exposure discipline. STANCE: AGGRESSIVE
A. PERFORMANCE
A1. Statutory PMS Performance Disclosure
| Year Ended | CED Long Term Focused Value (PMS) | BSE 500 TRI (Benchmark) | Difference | ||
| Return | Avg. Cash Eq. Bal. | Return | Trailing P/E | ||
| FY 2026 | 14.1% | 19.6% | -3.1% | 21.7x | +17.2% |
| FY 2025 | 10.3% | 21.0% | 6.0% | 23.4x | +4.3% |
| FY 2024 | 29.2% | 26.1% | 40.2% | 26.2x | -11.0% |
| FY 2023 | -4.3% | 30.0% | -0.9% | 22.3x | -3.4% |
| FY 2022 | 14.9% | 38.5% | 22.3% | 25.0x | -7.4% |
| FY 2021 | 48.5% | 29.0% | 78.6% | 38.0x | -30.1% |
| FY 2020* | -9.5% | 23.0% | -23.4% | 18.3x | +13.9% |
| Since Inception(7Y) | 14.0% | 26.9% | 13.9% | +0.1% | |
| *From Jul 24, 2019; ‘Since inception’ performance is annualised; Note: As required by SEBI, the returns are calculated on time weighted average (NAV) basis. The returns are NET OF ALL EXPENSES AND FEES. The returns pertain to ENTIRE portfolio of our one and only strategy. Individual investor returns may vary from above owing to different investment dates. Annual returns are audited but not verified by SEBI. | |||||
Margin of Safety
Investing involves unknowable and uncertain future. Despite perfect information or analysis, a prudent investment framework should incorporate margin of safety against error or bad luck. When such margin is unavailable or inadequate, a sensible thing is to wait for it. For, human over-reaction to uncertain or unwanted events often leads to price corrections and emergence of margin of safety for a prepared mind.
But like most good things, margin of safety comes at a cost of underperformance and, at extremes, ridicule in a rising market. However, first principles of investing and history reaffirm that overpaying ultimately punishes returns and having a safety margin rewards it.
We had found the margin inadequate and waited for majority of last 6 years by holding average 27% in cash equivalents. This partly led us to trail markets for 4 of the last 6 years. To be fair, the period between Sep-2020 and Sep-2024, was mostly a one way up market and not a full cycle. At the most difficult point (June 2024), we trailed the market by 5.0% p.a.
In last eighteen months, without changing anything, that gap has closed. This was mostly due to larger positions that we had built with margin of safety performed well as markets became more price and quality sensitive. This is not a pat at the back but gratefulness to you for sticking by and gratefulness to the enduring principle of margin of safety – and a reminder to continue its pursuit in a disciplined way.
Guidance: We have been pursuing this investment strategy since last 13 years (if we include pre-PMS days). After looking at annual returns of last 13 years we have noticed and can give you a broad guidance that we will most likely underperform in a rapidly rising market as we deploy cautiously and avoid frothy pockets. But we will most likely outperform in a weak or stagnant market as the caution reaps it reward. Over full cycle, hopefully, we will deliver a reasonable absolute return performance. We would urge you to read our future performance with this lens.
A2. Underlying business performance
| Past Twelve Months | Earnings per unit (EPU)2 | FY 2026 EPU (expected) |
| Dec 2025 | 11.11 | 10.8-11.23 |
| Sep 2025 (Previous Quarter) | 10.6 | 10.2-11.03 |
| Dec 2024 (Previous Year) | 9.2 | |
| Annual Change | 20.6% | |
| CAGR since inception (Jun 2019) | 14.2% | |
| 1 Last four quarters ending Dec 2025. Results of Mar quarter are declared by May only. 2 EPU = Total normalised earnings accruing to the aggregate portfolio divided by units outstanding. 3 Please note: the forward earnings per unit (EPU) are conservative estimates of our expectation of future earnings of underlying companies. In past we have been wrong – often by wide margin – in our estimates and there is a risk that we are wrong about the forward EPU reported to you above. | ||
Earnings per unit – When you invest, you are allocated notional units and NAV. For Rs 50 lacs of investment you are allocated 50,000 notional units of NAV Rs 100. We track the earnings performance of our aggregate portfolio companies by dividing normalised earnings accruing to us (number of stocks held x earnings per share) by outstanding units.
Trailing Earnings: We had revised the Earnings Per Unit guidance for FY26 to Rs 10.2-11.0 last quarter. Actual trailing twelve months earnings per unit till Dec’2025 came in at Rs 11.1, around the upper range of the updated guidance, and higher by 20.6% over last year (including effects of cash equivalents that earn ~6%).
1-Yr Forward Earnings: We slightly increase the guidance for FY26 forward earnings per unit to Rs 10.8-11.2.
A3. Underlying portfolio parameters
| Mar 2025 | Trailing P/E | Forward P/E | Portfolio RoIC | Portfolio Turnover1 |
| CED LTFV (PMS) | 21.7x | 21.5x-22.3x | 41.0%3 | 12.8% |
| BSE 500 | 21.7x2 | – | 17.7%2 | – |
| 1 ‘sale of equity shares other than liquid funds and client redemptions’ divided by ‘average portfolio value’ during the year to date period. 2Source: Asia Index. 3Portfolio Return on Invested Capital (RoIC) is on core equity positions. For BSE 500 index we share the RoE (Return on Equity) | ||||
B. DETAILS ON PERFORMANCE
B1. MISTAKES AND LEARNINGS
We did not discover any new mistakes this quarter.
B2. MAJOR PORTFOLIO CHANGES
Bought: We added to existing position in underweight portfolios to make it a 10% position
Sold: We trimmed one major position in overweight accounts.
B4. FLOWS AND SENTIMENTS
Mutual Funds stress test likely understates the stress
Since Feb 2024, SEBI has required mutual funds to publish monthly stress test. The stress tests calculate how many days will small cap and midcap schemes take to liquidate a quarter or half of the portfolio. As per the stress test reports, following are the weighted average days needed to liquidate half of the portfolio:
| Month | Days needed to liquidate 50% of portfolio (Wt. Avg.) | |
| Smallcap Funds | Midcap Funds | |
| Feb 2026 | 40 | 22 |
| Sep 2025 | 36 | 19 |
| Mar 2025 | 34 | 18 |
| Sep 2024 | 26 | 14 |
| Mar 2024 | 24 | 15 |
| Source: AMFI | ||
Interpretation – As of Feb 2026, smallcap funds would need 40 trading days and midcap funds 22 trading days to liquidate half of their portfolio. In two years, the time needed has increased by over 50% due to heavy inflows into these schemes.
However, the stress tests understate the true liquidity risk:
- They assume that during stress average traded volume of the securities will be 3 times the volumes of normal times. In March 2024 when BSE Smallcap Index fell 4.8%, 1050 stocks were in lower circuit. In same month, on another day 614 stocks were under circuit. During the times of stress, the volumes are far lower than normal times, not 3x.
- The stress test covers smallcap stocks only in the smallcap fund. Flexicap, multicap, midcap, thematic, and sectoral funds also own 10-20% of their assets in smallcap stocks.
Adjusted Interpretation: Adjusting for these, we can assume actual days may be 3x-4x. So mutual funds may take anywhere between 120-160 trading days to liquidate half of their portfolio of smallcap stocks.
Liquidity Risk – The risk is not restricted to small and midcap. In a crisis, only those assets that can be sold get sold. So, if smallcap stocks hit lower circuit, first cash (that is around 3-4%) and then large cap stocks will see selling pressure. As a safety measure, mutual funds enjoy a facility of borrowing 20% of scheme AUM for six months.
During April 2020, Franklin Templeton had to wind up six of its high yield debt schemes worth Rs 25,000cr. But as soon as news spread, unit-holders lined up for redemption. Even the 20% proved insufficient. The RBI had to step in with special liquidity facility of Rs 50,000cr to stabilise the frozen debt markets. However, those were debt funds. Doing the same for equity fund may lead to moral hazard. The only safety net will be locking the exit doors. But that will weaken the confidence that retail investors have gained in mutual funds in last 5 years.
Food for thought: The size of smallcap schemes in mutual funds may pose a systemic risk for Indian capital markets. A crazy solution could be an RBI like reserve requirement. The RBI requires around 21% of banks deposits (CRR + SLR) to be kept in liquid instruments like cash and government securities to meet sudden redemptions requests. SEBI may think of similar buffers to be built into smallcap mutual funds.
C. OTHER THOUGHTS
Buybacks poised for a comeback
The 2025 Union Budget had made the sale proceeds during a buyback taxable as dividend in the hands of the tendering shareholders. This increased the maximum tax rate to 33-38% (including surcharge) on entire proceeds from earlier regime of maximum 14%/22.4% (including surcharge) on long term/ short term capital gains respectively. Buybacks of shares had slowed last year due to this.
The recent Union Budget 2026 has corrected this by making buyback taxable again as capital gains. However, there is one change. Now the beneficial tax treatment is only for non-promoter shareholders. For promoter shareholders, while the gains will be considered as capital gains (and not dividends) the rate is roughly the same – 33.6% for individual promoters and 24.6% for corporate promoters (including surcharge). For promoters, there is no major tax arbitrage between dividends and capital gains.
SEBI, taking cues from tax changes, recently issued a consultation paper to reintroduce buyback through open market method (more efficient than tender offer method in our view).
We believe buybacks, when done correctly, improve shareholder value and welcome these changes.
A right buyback is one where:
- The stock trades below intrinsic value, and
- The company has free cash over and above its expected capex and opex, and
- There are no other better capital allocation alternatives.
Sadly, unlike US companies that have an ongoing disciplined buyback program, India has seen buyback misuse from promoters for (a) exiting at higher prices or (b) supporting share prices or (c) enjoying tax arbitrage (now plugged). There are a few exceptions to this, but there remains significant scope for improvement. With (a) open market buybacks expected to be back, (b) taxation regime better for minority shareholders, and (c) tax arbitrage closed for promoters, we hope to see more buybacks done for the right reasons.
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As always, gratitude for your trust and patience. Kindly do share your thoughts, if any. Your feedback helps us improve our services to you!
Kind regards
Sumit Sarda
Partner and Portfolio Manager
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Disclaimer: Compound Everyday Capital Management LLP is SEBI registered Portfolio Manager with registration number INP 000006633. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. This transmission is confidential and may not be redistributed without the express written consent of Compound Everyday Capital Management LLP and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Reference to an index does not imply that the firm will achieve returns, volatility, or other results similar to the index.