Cerno Global Leaders is a long term equity investment programme designed to identify and invest in high quality, defensible business franchises. (more…)

Japanese equity, which has been a consistent allocation within our client portfolios since 2011, now stands at a twenty percent weight. Within this allocation, the precise expression has changed over time.

Our approved list provides us with the necessary toolkit to alter allocations in response to changing drivers of the Japanese stock market.

At present, half of our Japanese allocation is to the Lyxor JPX Nikkei 400 tracker.

This ETF is assembled of companies, predominantly large caps, which score favourably on a shareholder value creation ranking. The Japanese equity market is attractively valued and we anticipate further improvement in return on equity (ROE), which currently averages nine percent across the corporate universe.

With his triumvirate of ‘arrows’, Japanese Prime Minister Abe introduced measures to reform corporate governance and refocus corporate attention to the shareholder. These aim to prompt companies to allocate capital more efficiently and target returns on equity above the cost of capital, or to return cash to investors in form of higher dividends and share buybacks.

To encourage companies to adhere to these principles, the Japanese Exchange Group (JPX, world’s third largest bourse operating the Tokyo Exchange amongst others) and Nikkei have jointly created the JPX Nikkei 400 Index. This index explicitly selects companies which focus on the efficient use of capital, specifically referring to ROE, as well as those promoting good corporate governance.

It excludes companies which have been listed for less than three years, have liabilities in excess of assets during any of the past three fiscal years, those which had an operating deficit in all of the past three fiscal years and those which are designated for delisting.

Eligible companies are scored and ranked according to the following criteria:

  1. 3 year average ROE
  2. 3 year cumulative operating profit
  3. Market capitalisation on the base date for selection

Point one and two are each given a weighting of 40% and market cap is only weighted with 20%. In contrast, the TOPIX is a market cap weighted index and the Nikkei 225 is a price weighted index.

To encourage adoption of corporate governance standards, scoring based on qualitative factors is also applied and focuses on the following three items:

  1. Appointment of independent directors (with the requirement of at least 2)
  2. Adoption or scheduled adoption of International Financial Reporting Standards (IFRS)
  3. Disclosure of English earnings information via TDnet (company announcement distributions service in English)

Whilst these features are common in companies listed in the US or Europe, to the majority of Japanese companies, these are rather uncommon features to date, even for some large multinationals.

The 400 highest scoring companies are selected for the index, subject to buffering rules to minimise turnover. Constituents are reviewed once a year in August and companies can be dropped if they no longer comply with the criteria. This is consequential in a country with a shame culture, such as Japan. The index has already been dubbed the ‘Shame Index’.

To compliment this broad exposure, we are invested in two mid to small cap specialists: Polar Capital Japan and Michinori Japan Equity.

James Salter, manager of the Polar Capital Japan fund runs an all cap strategy, but typically with a mid to small cap bias. James’ experience in the Japanese equity market is long standing and he has managed the fund since inception in 2001.

To direct his research efforts, the manager first analyses strategic macro trends, both in a domestic and global context, to establish broad sectoral consequences. The bottom up stock analysis is done with a bias to value and growth characteristics.

Allocations are typically geared towards exporters, financials and cyclicals (or defensives depending on the prevailing environment). Domestic exposure is typically low.

Michinori’s fund manager, Sean Lenihan, has spent the better part of his career focusing on the local Japanese small cap market. He is based in Japan and his language fluency gives him an edge over international fund managers as many of his holdings’ management teams are not equipped to deal with international investors and few of the small cap holdings are covered by analysts.

The manager builds his portfolio entirely from a bottom up basis. He believes the Japanese equity universe offers the value investor companies with strong balance sheets, earnings growth and shareholder focus which provide higher ROE characteristics than the overall market, irrespective of macro influences.

In the recent restructuring of positions, we have split part of our active allocation between the existing Polar Capital Japan fund and the less well known Michinori Japan Equity fund. The reasoning behind this shift is Michinori’s strong domestic exposure versus both the large cap index we hold and the Polar Capital Japan fund.

To give a flavour of the portfolio, 73.5% of the revenues of Michinori’s underlying holdings are domestically derived and those that are international have very little revenue exposure to either China or the emerging markets in general. Investments are focused in companies with good visibility on the outlook for increasing expenditure by customers.

42% of the portfolio is invested in companies with a market cap of below £1.5bn. Noteworthy is the 11% of holdings of companies below £350m. Polar’s small cap exposure currently focuses on the £350m to £1.5bn range.

Commonality between our large cap index tracker, Michinori and Polar is as little as 11% and 12% respectively, as would be expected. However, the overlap between Polar and Michinori is not large either. Less than 10 names are shared in both portfolios. The latter fund has an industrial bias, a higher exposure to technology stocks and puts less weight on financials and materials on a relative basis.

Our allocations across all investments are geared toward companies with sustainable ROE growth and shareholder friendly management. We have modest exposure to consumer staples, healthcare, materials and utilities.

Portfolio construction is also a point of differentiation between the two active managers. Due to the difference in assets under management (Polar Capital Japan manages US$2.8bn and Michinori less than US$150mn), position sizes in the latter are much larger and the portfolio is much more concentrated. Sean Lenihan tends to hold around 35 positions, top ten names make up close to 50% of the portfolio. Polar holds 70 to 100 holdings depending on the prevailing opportunity set.

Having successfully managed the portfolio since 2001, Polar Capital has soft closed the strategy to retain its agility to invest across the entire market cap range. Michinori intends to close the strategy at around £600m to retain its small cap bias.

At Cerno Capital, we believe in a) the ability of some managers to outperform and b) our ability to identify them. (more…)

When investors talk of long-term trends, they are often referring to the next three to five years. (more…)

For the unconstrained global investor, Australia is a prospective hunting ground for profit. Any comprehensive analysis of the main trade and capital trends at work in the world find their conflux in Australia’s capital markets. Predicated on China’s fixed asset investment boom over the past quarter century, Australia’s economy has been substantially driven by demand for its ores and minerals. It relates uneasily, it seems at times, on account of deep cultural differences, to the rest of Asia, in particular Indonesia.

Australia is an affluent, urbanised society. It is, above all, a consumerised population that is, in economic jargon, fully financially included. It has an independent central bank and currency.

On account of these features, backed by disciplined capital markets and secure laws, Australia’s equities, government bonds and currency have been a destination for macro investors of all stripes, including hedge funds.

We measure recent opportunities by looking at 12 month rolling returns of its currency, benchmark bond and main equity index.

12M Rolling Returns - Australian Equity, Bond & Currency

Source: Morningstar/Bloomberg

When the currency is weakening, returns from key asset classes are crimped, as can be seen in the below chart.

12M Rolling Returns - Astralian Equity, Bond & Currency

Source: Morningstar/Bloomberg

The tricky thing with macro investing, prosecuted via Australian instruments, is the various counter influences at work. We list these as follows:

– Shorting the AUD is intrinsically expensive on account of the yield differential between AUD and its obvious corollaries. For example, the yield differential between AUD and USD, based on 1Y rates has averaged 304bps over the past 5 years.

– Outright investments in the sovereign bond market have delivered returns in AUD based on the general fall in rates accompanied by some flattening of the curve. However, for a non-domestic investor, these gains have been crimped by AUD weakness. Longer range, strategic investments in the bonds require the adoption of significant currency risk. Against them are lined up the yield hunters and persistently positive capital flows of new immigrants from China and elsewhere.

– Many macro commentators have long predicted the demise of the economy as they surmised that that falling commodity prices would spur some form of recession that could include a property down cycle. This has tempted some funds to go short Australian equities and the banking sector, in particular, has been targeted. To their frustration, the Australian equity market has remained peachy, supported by Australia’s superannuation schemes (government mandated pensions), with the banks especially valued for their income stream.

– To cap these, the various identified trends have been subject to reversal. In particular the currency which fell 20.1% between July 2014 and April 2015 has strengthened by 6.7% from 2nd April 2015 to the time of writing.

Cerno Capital’s core strategy ran a short Australian dollar position profitably until it was closed on 16th February 2015. We currently hold no specific exposures to Australia directly.

Within global equity markets, April saw value style indices outperform growth style indices. The relative return of one style versus the other would not typically be a significant event and the relative outperformance was just 1% according to the Russell Global Style Indices. However, the prolonged period of underperformance of the value style versus growth (a 5% difference over the last year and a 37% difference since 2005) and the associated headwind for equity investors with pronounced value style bias means that observers are in a mood to call for a change in trend.

Can we observe a similar pattern in active manager universe data? For reliable style universe data we look to the Morningstar US large cap value and growth peer groups. The median value manager has underperformed the value and broad market indices over the last five years while outperforming over one and three months. Meanwhile the median growth manager has lagged the growth and broad market indices over the last month after a prolonged period of outperformance over the broad index (the median growth manager rarely outpaces the growth index).

So perhaps we are onto something? It is important to remember that a value style index is a naively implemented strategy which will typically have high allocations to companies which are optically cheap on asset and earnings multiples. There is also a tendency for value style indices to hold high weights in cyclical industries when trailing multiples suggest value, because the equity market discounts a cyclical decline in earnings. We must therefore look to the underlying composition of the style indices.

When we do this, the picture becomes clearer. The largest sectors in the Russell Global Value Index are Financial Services and Energy – two beleaguered sectors which performed strongly in April.

So it appears that we are really looking at a sector effect. Peering further into the data can provide some support for this stance. The outperformance of value over growth in Latin America, again according to the Russell Indices was 9%, a much greater differential driven by the significant weighting in extractive industries within the Latam area. The picture is murkier in Asia ex Japan, a region with a much lower weight to Energy, but a high weight in Financials, particularly in China which rallied hard in April. The headline style indices suggest value also outperformed in April. However, the style team at UBS performs a much more granular assessment of style returns than the major index providers and they found that value styles continued to fare poorly across Asia.

Does any of this help us in managing our equity allocation? Emphasising value over growth is very different to implementing a valuation discipline – we would always argue in favour of the latter. Given the driver of style returns appears to continue to be sector, it makes more sense to spend time making sure stock and sector exposures are supported by a sound investment thesis. cheap hotels . With regards to manager selection, deep value managers with an unconstrained approach to sectors are the group with the most to gain from sector reversals – just be certain they are not holding value-traps enjoying a dead cat bounce.

This article first appeared in Wealth Manager magazine.

Comments surrounding the report of negative inflation for the UK are designed to insinuate that negative inflation does not equal deflation. (more…)

I recently met Colin. He has the longest unbroken track record in the UK Equity Income sector.

We did not talk about his Income fund; instead, we talked about his Blue Chip Equity Fund, which, notwithstanding a long track record has seen assets dwindle as investors joined the passive bandwagon – predominantly through Exchange Traded Funds (ETFs). Colin’s fund will be converted into a UK Rising Dividends Fund. The strategy makes a great deal of sense – focus on businesses with a track record of dividend growth and with the potential to maintain that growth. A set of rules whittle his universe down to a manageable list, then his experience and brain take over.

The challenge for Colin is that the passive ferry may have already picked up his potential passengers. The growth in ETF-land is now focused on “Smart Beta”, “Factors” or “Advanced Beta”. The terminology proliferates as quickly as the number of ETFs. domain name search Total assets under management (AUM) in these products exceeds half a trillion dollars.

If an active strategy can be defined by a set of rules using publicly available data, an index can be calculated and an ETF can be created to passively track that active strategy. We have recently witnessed a slew of ETFs offering exposure to “Value”, “Momentum”, “Quality”, “Size” and “Minimum Volatility”.

So, the world of passive is increasingly active, aggressively so, but is the man at the tiller awake? We know that the weight of AUM following any given strategy has an impact on potential returns. Even P&O’s finest ships have a finite capacity for passengers, cross that limit and the ferry begins to sink.

And what of Colin? Naïve dividend ETFs have been with us for some time – they were loaded up with high yielders prior to the Financial Crisis and holders quickly experienced the pain of dividend cuts – the pay-out on the iShares UK Dividend ETF is still 29% below the peak in 2008; its current largest holding is a supermarket. Colin understands that investment management is a blend of art and science and is very much alert and in control of his tiller.

 

 

The launch of QE by the ECB on January 22nd represents a milestone in the drawn out campaign against disinflation. With all the major Central Banks of the world having ‘deployed’, it is logical to begin to contemplate the consequences of failure in these monetary campaigns.

Extending the military analogy to ISIS or the Taliban, one’s foe can prove more malicious and tenacious than anticipated. So of deflation, where the collapse in the price of oil surely skewers the thought that other vestiges of disinflation are just isolated events.

In the instance of the failure of uncoordinated monetary easing we might expect coordinated money easing which, if that in turn fails, genuine helicopter money becomes the final barrage.

This is the mechanism where deflation could flip to inflation in an uncontrolled manner. That disastrous phase can plausibly take us to a place where there is a general loss of confidence in money.

We now rate the probability of this sequence of events as higher than zero. January 22nd of this year is a significant date: the ECB is now firing its bullets. Beyond these, there will be no more bullets other than the ones that, eventually and if they are not successful, risk these outcomes.

What are the defences against such an outcome? Relative value protection would be achieved in land, gold, diamonds and jewels. These are about the only things that would work.

Typing “Smart Beta” into Google yields sixty-four million hits. Close to the top of the list is the headline “Smart Beta – The Investing Buzzword that Won’t – and Needn’t – Die”. For every advocate there is a cynic such as GMO’s James Montier who coined the equation “Smart Beta = Dumb Beta + Smart Marketing”. Montier observes that many of these ETFs seek to capture a premium attributed to one of two factors; Value and Size.

So, let’s be clear, most strategies labelled as Smart Beta, are in truth portfolios designed to capture the returns from a particular factor of which Value, Size, Momentum and Quality are the most well-known. Investment strategies targeting one or more of these factors are not new. Wells Fargo’s investment business became a leader in passive equity investment between 1975 and 1990 when it merged with Nikko Investment Advisors and developed factor tilt portfolios that became a staple product of Barclays Global Investors (BGI) which was the business created by the purchase of Wells Fargo Nikko Investment Advisors by Barclays PLC in 1995. BGI spawned iShares and was subsequently subsumed by BlackRock. Meanwhile State Street Global Investors, Goldman Sachs Asset Management and many more specialist asset managers, of which BGI was the leader, met a seemingly insatiable demand for low-tracking error, quantitatively implemented portfolios that delivered, according to back-tests, the holy grail of benchmark plus 2%. Marketing materials talked about high levels of diversification. But were they? Almost without exception these strategies combined value, size, quality and momentum and some added a bit of leverage. The result was inevitable – too much money chasing the same stocks – and what become known as the quant crash of August 2007, triggered by the unwinding of a leveraged multi-factor portfolio.

Smart Beta Exchange Traded Products allow all investors to chase these factors.

Why are factors so attractive? From the investor’s perspective, the act of committing capital requires the assessment of uncertainties and the application of probabilities to make decisions. Uncertainty makes humans uncomfortable. If science or academia can offer us certainty, we believe we will sleep better, convinced we have found a free lunch. From the scientist’s perspective, the equity market provides an almost infinite quantity of his favourite food – data. And if tortured enough, this data will reveal powerful secrets which may well support prior beliefs. Fama and French told us about Size and Value in 1993, at the same time Jagadeesh & Titman showed us the power of momentum and then received support from Hong and Stein in 1999. The work of Piotroski in 2000 found that “quality” is another route to equity investment success. The work of Grinold and Kahn in 1995 (the orchestrators of BGI) demonstrated how this work could be pulled together to deliver investment success. Their book is seminal reading for all quantitatively oriented investors. This work appeared to offer certainty.

This certainty is dangerous. Blindly following a factor based strategy will lead investors into the same companies as others following the same factors – and there will be many as the research papers reside in the public domain as academics must be published to achieve peer review. This was observed in August 2007 when a leveraged factor portfolio, allegedly run by Goldman Sachs, was unwound and triggered a wave of selling across all similar “smart beta” portfolios which unwound years of carefully nurtured “alpha”.

Two days ago, we were sent some marketing documents for an Equity Risk Premia Beta Neutralised Portfolio. It is available in both UCITS compliant OEIC form or as an ETF. All the investor is asked for is their choice of leverage – will sir be taking 3x or 5x today?

Here we go again………

“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan.

After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage.

Figure 1. Share buyback Programs

Share buy back chartSource: Goldman Sachs. As at 8th September 2014.

One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in Japan and those companies not ‘part of the club’ are expected to take action to change this. Another key feature of the trend towards improved profitability is that corporates are paying out more in dividends and using cash on their balance sheets to buy back shares. Figure 1 above shows this trend clearly. Currently, Japanese corporates have Yen70tr net cash on their balance sheets, this is approximately 25% of the total stock market capitalisation. Buy backs of this kind will, of course, further increase return on equity (ROE) and profitability.

Figure 2. Table showing global equity valuations

EPS Growth P/E Ratio P/B Ratio EV/EBITDA ROE DVD Yield P/CF
Name FY15E FY16E FY15E FY16E FY15E FY15E FY15E FY15E FY15E
Japan 16% 14% 14.0 12.3 1.3 7.7 9.3 2.2 8.5
US 8% 8% 17.2 16.0 2.7 9.8 16.0 1.9 10.8
Europe 6% 12% 15.4 13.8 1.8 7.6 11.3 3.3 12.4
Asia ex. Japan 9% 13% 13.1 12.2 1.6 7.1 12.4 3.1 10.7

Source: Goldman Sachs. As at 12th September 2014.

It is interesting that despite the recent slow-down in economic growth, earnings growth in Japanese has continued to be strong. Table 2 above shows how Japanese company valuations compare very favourably with other global equity markets. ROE is currently rising and on the way to 11%. It was recently predicted at a lunch held in our office by Hugh Sloane of Sloane Robinson that Japanese profits will surprise on the upside and that an ROE of 15% is very achievable, furthermore in 5 years’ time Japanese ROE will be above that of the US. The point that US corporate profitability is at an all time high and Japanese profitably is rising from a low base is well made. The chart below, figure 3, shows how all major profit drivers are moving in the right direction. Du Pont analysis shows that so far the only underlying measure that has significantly turned up is net profit margins; asset turnover and leverage are only just starting to move. It would be unlikely not to get further improvement in asset turnover once deflation has formally ended, as it removes any incentive to hoard cash.

Figure 3. Evidence of improved profitability

Evidence of improved profitability chartSource: Mizuho Securities. As at April 2014.

The other major leg in the argument is that that the monetary expansion that has doubled the size of the monetary base is bringing about an asset reflation. Property rental prices are now starting to rise, see figure 4. There are negative real interest rates currently in Japan, this is confirmed by the break even yields on inflation linked bonds. Wage growth is still sluggish, but total compensation is up for the first time in decades. The Bank of Japan is explicitly targeting a 2% inflation rate, which is a significant change from past policy.

Figure 4. Evidence of rising rents

Evidence of reflation chartSource: Barclays Research. As at 1st September 2014

The risks to all the above are that Abenomics may fail to stop deflation. While we see this as an unlikely outcome, the poor economic numbers following the sales tax increase may continue and the trend in other developed markets currently is for less inflation not more. The marginal buyer of the stock market has been the foreigner, the hope is that with the end of deflation, domestic investors will turn bullish, change their preference for liquidity and will incrementally buy more equities. This is much less likely without an end to deflation.

Japan continues to be misunderstood. When we think about the opportunity in Japan, some knowledge of Japanese history and character is useful. The Japanese domestic investment sector is of great significance. It continues to slumber for now and when it is awakened it will likely have a pronounced effect on equity market direction and tone. We suggest the opportunity is barely plumbed and target at least 40% of our equity market exposure towards Japan presently. If you would like to find out more about how we access the Japan opportunity, please contact Hannah Sharman (hannah@cernocapital.com).“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan.

After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained and our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage.

Figure 1. Share buyback Programs

Share buy back chartSource: Goldman Sachs. As at 8th September 2014.

One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in Japan and those companies not ‘part of the club’ are expected to take action to change this. Another key feature of the trend towards improved profitability is that corporates are paying out more in dividends and using cash on their balance sheets to buy back shares. Figure 1 above shows this trend clearly. Currently, Japanese corporates have Yen70tr net cash on their balance sheets, this is approximately 25% of the total stock market capitalisation. Buy backs of this kind will, of course, further increase return on equity (ROE) and profitability.

Figure 2. Table showing global equity valuations

EPS Growth P/E Ratio P/B Ratio EV/EBITDA ROE DVD Yield P/CF
Name FY15E FY16E FY15E FY16E FY15E FY15E FY15E FY15E FY15E
Japan 16% 14% 14.0 12.3 1.3 7.7 9.3 2.2 8.5
US 8% 8% 17.2 16.0 2.7 9.8 16.0 1.9 10.8
Europe 6% 12% 15.4 13.8 1.8 7.6 11.3 3.3 12.4
Asia ex. Japan 9% 13% 13.1 12.2 1.6 7.1 12.4 3.1 10.7

Source: Goldman Sachs. As at 12th September 2014.

It is interesting that despite the recent slow-down in economic growth, earnings growth in Japanese has continued to be strong. Table 2 above shows how Japanese company valuations compare very favourably with other global equity markets. ROE is currently rising and on the way to 11%. It was recently predicted at a lunch held in our office by Hugh Sloane of Sloane Robinson that Japanese profits will surprise on the upside and that an ROE of 15% is very achievable, furthermore in 5 years’ time Japanese ROE will be above that of the US. The point that US corporate profitability is at an all time high and Japanese profitably is rising from a low base is well made. The chart below, figure 3, shows how all major profit drivers are moving in the right direction. Du Pont analysis shows that so far the only underlying measure that has significantly turned up is net profit margins; asset turnover and leverage are only just starting to move. It would be unlikely not to get further improvement in asset turnover once deflation has formally ended, as it removes any incentive to hoard cash.

Figure 3. Evidence of improved profitability

Evidence of improved profitability chartSource: Mizuho Securities. As at April 2014.

The other major leg in the argument is that that the monetary expansion that has doubled the size of the monetary base is bringing about an asset reflation. Property rental prices are now starting to rise, see figure 4. There are negative real interest rates currently in Japan, this is confirmed by the break even yields on inflation linked bonds. Wage growth is still sluggish, but total compensation is up for the first time in decades. The Bank of Japan is explicitly targeting a 2% inflation rate, which is a significant change from past policy.

Figure 4. Evidence of rising rents

Evidence of reflation chartSource: Barclays Research. As at 1st September 2014

The risks to all the above are that Abenomics may fail to stop deflation. While we see this as an unlikely outcome, the poor economic numbers following the sales tax increase may continue and the trend in other developed markets currently is for less inflation not more. The marginal buyer of the stock market has been the foreigner, the hope is that with the end of deflation, domestic investors will turn bullish, change their preference for liquidity and will incrementally buy more equities. This is much less likely without an end to deflation.

Japan continues to be misunderstood. When we think about the opportunity in Japan, some knowledge of Japanese history and character is useful. The Japanese domestic investment sector is of great significance. It continues to slumber for now and when it is awakened it will likely have a pronounced effect on equity market direction and tone. We suggest the opportunity is barely plumbed and target at least 40% of our equity market exposure towards Japan presently. If you would like to find out more about how we access the Japan opportunity, please contact Hannah Sharman (hannah@cernocapital.com).

In the past five years since the onset of the 2008 financial crisis, it has been tempting to view the key investment choices through either end of a long scope with one view depicting inflation and the other deflation.

Seeing the world in polar opposite terms, or binary terms, leads to quite distinctly  different asset allocations. In a deflationary environment, cash and government bonds (both nominal and linked) are the assets of choice whereas, should inflation reign, equities should be preferred over bonds or cash and other putative real assets such as commodities and properties become legitimate alternatives.

Some asset managers, Ruffer springs to mind, have defined themselves by an historically referenced projection of hyperinflation and have made sympathetic allocations.

For a while, we were swayed by this line of reasoning.  In the early part of the crisis period, key global economies veered toward deflation at an alarming rate, and whilst Central Bank and Treasury intervention did avert this, the threat persisted for a good deal longer than the performance of risk assets would suggest. It was argued that Central Banks, by debasing fiat currency values, would create high or hyper-inflation as they took gargantuan steps to avert negative inflation (deflation).

However, we abandoned the axiom, recognising that whilst monetary expansion might be a necessary condition to generating inflation, it is not a sufficient one.  It seemed to us that there was too much store placed in the belief that QE would generate the continued outperformance of gold and inflation linked bonds and other assets labelled “inflation protection”. Our own work suggested that very few assets, perhaps none, should be regarded as offering water-tight inflation protection.

They fail for various reasons.  The failure of gold and equities is observable from history.  Inflation linked bonds, which is a relatively new asset class, fail on account of their direct linkage to nominal bonds. ILBs are in fact not a real asset at all but a nominal asset with an indexed cash-flow stream. ILBs have only existed in an era of disinflation, so are not that well understood by the investing community at large.

Better returns have been possible by underpinning asset allocation with a forecast that global inflation remains within normal boundaries, neither deflationary nor hyper-inflationary.

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This Legal Notice is governed by English Law and the English courts shall have exclusive jurisdiction over any matter arising out of this Legal Notice or from your accessing of the website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

The information contained herein does not constitute an offer to sell or the solicitation of any offer to buy or sell securities and or any derivatives and may not be reproduced, further distributed or published by any recipient without prior permission from CERNO CAPITAL.

By accessing and using the CERNO CAPITAL’s website you acknowledge that you have reviewed this Legal Notice and understand and agree to the terms and conditions contained herein.
This website has been published by CERNO CAPITAL which is authorised and regulated in the UK by the Financial Conduct Authority.

CERNO CAPITAL is a registered limited liability partnership in England and Wales (Incorporation Number OC326579), registered office: 34 Sackville Street, London, W1S 3ED.
By clicking on the “Submit” button you are stating that you are eligible to access this site and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this website.

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The Endowment Fund (hereafter “the Fund”) is an Unregulated Collective Investment Scheme (“UCIS”) for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the ‘Act’) and as a consequence its promotion in the UK is restricted by law.

Interests in the Fund will be offered for sale only pursuant to the prospectus (offering memorandum) of the Fund and investment into the Fund may be made solely on the basis of the information contained therein.

Access to information about the Fund is intended solely for distribution to professional clients, eligible counterparties and those persons to whom the promotion of UCIS is permitted under the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and COBS 4.12 of the Financial Conduct Authority’s Handbook. Investors may not have the benefit of the Financial Services Compensation Scheme and other protections afforded by the Act or any of the rules and regulations made there under. If you are unsure on whether you are eligible to access this section of the website, please contact our compliance officer.

There is not an active secondary market for shares in the fund. As such the only method of obtaining a return of capital may be via redemption. There may be notice periods, redemption penalties or other impediments to liquidity. In addition, some of the underlying investments contain gate clauses that prevent more than a certain percentage of investors redeeming at any one time.

By submitting your email address below you are stating that you are eligible to access this website and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this web site.

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Thank you for requesting access to our Funds pages.

We will shortly mail you a password to the email address you supplied. Should this not reach your inbox within the next 5 minutes (be sure to check your junkmail) please contact us for further assistance via our contact page.感谢您请求访问我们的基金网页。

我们会尽快将密码发送至您提供的电子邮件地址。如果 在此5 分钟后仍未收到我们的邮件(请一定要检查您的 垃圾邮件),请通过联系方式的页面联系我们并寻求进 一步帮助。