Stellar Wealth Partners India Fund I, LP is an investment partnership modeled after the original Buffett Partnership fee structure. The fund has a minimum investment ticket size of $250,000 and is only available to Accredited Investors in the US. Investors in the fund pay no management fees, and we only get compensated for returns that exceed 6% annually, subject to a high-water mark provision. Our zero-management fee structure and fund manager’s significant investment in the fund leads to a highly-aligned partnership. The fund seeks to preserve capital and achieve long term capital appreciation with controlled risk by focusing on the margin of safety of an investment. We view risk as the probability of permanent loss of capital, not the temporary swings in a security’s market price. We actively seek undervalued and attractive investments in the Indian stock market that can be purchased at discounts to their intrinsic value. Our fund is unconstrained by sector and style, and we invest our capital in our best ideas. We employ a tax efficient approach given our long-term investment horizon. Our mission is to significantly grow the buying power of our investors over a multi-year timeframe. We seek to achieve this objective using a bottom-up fundamental approach executed in a disciplined and consistent manner.

Stellar Wealth Partners has a partnership mentality. Since nearly all of our founder’s liquid net worth is invested in the strategy, our money will always be invested right next to yours. By doing so, we believe this incentivizes us to continually strive for the best risk-adjusted returns, and allows us to grow our net worth alongside our partners. We manage risk by emphasizing business & management quality, seeking a margin of safety, avoiding use of leverage, short selling & derivatives, avoiding speculative fads, and maintaining a diversified portfolio.

When our fund was originally formed, we believed there was a better way to provide investment results for our partners, while managed in a structure that was more client-friendly than the traditional hedge fund structure of 2% management fee and 20% incentive fee. Having a fixed management fee irrespective of performance is a highly lucrative business model and would have guaranteed us a profit in the first year. However, we didn’t view it as fair to clients. As a business owner, it was a case of heads I win, tails I win even more. In fact, Warren Buffett had spent years complaining about the 2 and 20 fee structure calling it obscene. He went so far as to make a highly publicized bet in 2008 against a hedge fund on the premise that their high fees would cause them to underperform a basic S&P 500 index fund over the next decade. Unsurprisingly, Buffett easily won and by a massive 490 basis points!

Before Warren Buffett took control of Berkshire Hathaway, he ran his own partnership that employed a 0/6/25 fee structure. He took the unconventional approach of charging no annual fee but 25% of the profits above a 6% hurdle rate. For example, if the fund returned 14% for the year, then the fee would be 2% (14% minus 6% equals 8%. One quarter of 8% is 2%). And if the fund returned 6% or less, then Buffett would receive no fees at all.

The Buffett model aligned us as a business owner. If we wanted a higher performance fee, we would have to make our clients more money. There was the obvious risk that if our stock picks were poor, we wouldn’t get paid anything at all. In addition to that, our personal capital invested in the fund would depreciate in value. But that was the whole point of launching an actively managed fund! Incentives can significantly enhance and align motivations. A management fee-based firm will attract highly paid and very successful sales people because raising capital can deliver significant bonuses. Similarly, compensation based solely on long-term performance will attract those who can deliver superior long-term investment results. We have aligned ourselves with the latter. Compensation is earned only after reaching new all-time highs (high-water mark) and on annual returns above 6%. The economics are simple: we don’t earn a penny until our partners have made at least 6% annual return. Further, keeping the best interests of our clients in mind and in order to maximize their long-term net returns, we decided to have a 20% performance fee instead of 25%.

When an investment firm becomes too big in size, it begins to incur high impact costs while buying or selling a small cap stock, which precludes it from taking meaningful positions in smaller size, high-growth companies. Thus, we will be restricting the size of our AUM in future to ensure we can generate the good returns that will be required to earn a performance fee. This way, we will be far less prone to becoming an ‘asset gatherer’. The fund will ‘hard-close’ when deemed appropriate by the fund manager (i.e. no further fund infusion by existing or new partners – save for an occasional opportunity to invest new capital post a prolonged bear market or an abrupt market crash like March 2020). A relatively modest level of AUM will allow us the long runway we seek (25-30 years), with excess size not likely to become an impediment to our goal of delivering healthy returns for our partners for many years. The fund structure is thoughtfully designed to ensure a long runway for growth and to pass on the benefits of increasing scale to clients. Investors in the fund (including the fund manager) are allocated the operating expenses of the fund. These expenses will decrease to a very small % of AUM over time as the fund value grows in size.

Philosophically, we don’t believe in placing legal restrictions on our partners (lockups, exit loads, etc.). Mutual trust and alignment with our partners are the foundation of Stellar Wealth Partners, which we build via careful vetting and getting to know our partners over a period of time. We believe that if we emphasize transparency and integrity in our relationship with all stakeholders, it will ensure long-term success for our firm.

Given our long investment horizon, we recommend that clients only invest assets with at least a 10 – 15 year timeframe (and optimally much longer). We are investors, not traders, and expect our clients to invest alongside us with a similar long-term mentality. We recommend interested clients to review The Stellar Wealth Partners Owner’s Manual in order to align with our investment philosophy.