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This aritcle was written by Will Grahame-Clarke and first appeared in thewealthnet on 29th September 2014
Cerno Capital’s James Spence believes interest rate normalisation should start in the US sooner than markets expect.
Mr Spence, lead manager of the Cerno Capital’s flagship multi asset portfolio TM Cerno Select, argues the progress of returning to normal inflation rates has been delayed for too long and the actual policy itself has not reached the parts it was intended to reach.
He is currently most bullish on Japan which he says is finally emerging from its bear run dating back to the 1980s. Mr Spence, like fellow Cerno Capital founder Nicholas Hornby, is well acquainted with Asian equities. Between 1991 and 2004 he worked as an equity analyst, head of research, and then as equity strategist at various firms based in Hong Kong, Singapore and Jakarta.
Asia is an area which has more exposure than most to the Federal Reserve’s interest rate decisions.
“Central banks have been reluctant to decisively signal when the price of money is going to change,” Mr Spence told thewealthnet.
“Normalisation now would make it easier for businesses to read the runes so they could more easily make decisions about investing and acquisitions. It now seems to be going on for too long.
“It is as if we are being treated like children that we can’t cope with a higher price of money.
“We would welcome more clarity and we don’t see normalisation as necessarily upsetting asset class returns. If you look around the world in many places, while they are not springily robust, they are OK.”
Mr Spence says there are several reasons for this delay: “It is possible that one reason for this delay is handing responsibility for the employment figures to the central bankers. In the US we are never going to see three percent employment. The definition of full employment needs to be looked at and I think that is part of it.
“There is also a problem in the investment world where today’s indicated return after inflation is not great relative to historic averages. One effect is a prolonged bull run in core bond markets which has driven allocation into fringe bond markets which are not particularly liquid.”
Mr Spence’s stance on bonds is distinctive of the unconstrained and benchmark agnostic nature of Cerno’s proposition alongside its long term three year investment perspective.
“We remain absent from bonds across all our portfolios because we don’t see value in core bond markets and we don’t see the liquidity in corporate and high yield bonds.
“We are completely unconstrained. As such we don’t need to hold any asset class just for the sake of it. We have been out of bonds for some time.”
It is a long view that protected Cerno Capital’s clients during the 2008 crisis: “That flexibility worked for our investors because we had a lot of cash, a strong currency expression, investments with macro managers and long on volatility.”
However, since that moment Cerno have been constructive on risk assets.
The flagship TM Cerno Select Fund’s largest allocation is in equity strategies. The supposition was that US equities, being the first country into the crisis would the first out has worked well. Today, US expressions are more tiled to late cycle themes: arbitrage specialists on the basis of increased M&A activity and US banking shares: strategies that will not be upset by higher interest rates .
Cerno had also been “quite constructive” on Europe even during the Greece and Cyprus crises. But Mr Spence says Europe now doesn’t offer meaningful value from a global perspective with the exception of the UK. As such, direct exposure to European equities across the core Cerno funds has been removed.
“Our favourite market right now is Japan. Early last Autumn Japanese stocks went down to book value or just below. There is something spiritual about book value – it is the simplest way to think about value in a company. It marked the end of the bear market.
“We now want to see increasing wages, consumption activity and increasing corporate profits and these things are starting to happen.”
Mr Spence’s career familiarity with Asia is he says more likely to give him awareness of the region’s faults as it is opportunities.
“We are not taken by the rest of Asia; earnings valuations look rather flattering and much less so once you exclude Chinese banks and regional energy companies. We are bearish on Chinese property but its decline will stop short of being a global deflationary event.”
Mr Spence argues that the flexibility of TM Cerno Select is its strength, avoiding the pitfall of having to have a doctrinaire view on either inflation or deflation.
“It is better to invest with an aspect to one outcome with a portfolio that is constructive but flexible,” he concludes.
Mr Spence is managing partner at Cerno Capital and lead manages two collective investment funds TM Cerno Select and EF Unconstrained. He is a member of the Chartered Institute for Securities & Investment.
Cerno Capital has also recently recruited Hannah Sharman to represent the firm’s multi-asset strategies to the investment market place. She is responsible for the investment relationships between Cerno Capital and regulated firms and intermediaries throughout the UK and Europe. She joined Cerno Capital from BlackRock.
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