FayRen

About Fay Ren

Fay Ren works within the investment group and has specific responsibility for quantitative measurement of sector, style, portfolio and asset class returns. She undertakes asset class studies and coordinates the firm’s top-down symposia at which asset class settings are determined. She also undertakes security analysis in conjunction with the Portfolio Managers. Fay joined the firm from Imperial College London where she completed a BSc in Mathematics and a Masters in Applied Mathematics.

The Custom Option

By |2018-07-11T08:54:19+00:00July 9th, 2018|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Investment Quarterly, Other Posts, Strategy|

Conducting big business in the decades following the industrial revolution normally entailed the marshalling of labour and resources in a profitable sinecure. Fur trappers and tin miners, agriculture and energy, railroads and steel all fit this model. These industries persist today but are becoming scarce in the pantheon of very top companies measured by market capitalisation or economic value addition. Labour has mobilised, a thicket of laws exists to prevent excessive exploitation and monopolies of international scale are prohibited. Only perhaps in the world of software and social media have we seen the kind of recently accrued market share power that breeds exploitative practices: Microsoft’s dominance of operating system software is a matter of historic fact and Facebook’s control of the network effect across its platforms are prime examples of predatory corporate behaviour: rabid until checked. Outside these large and unusual cases, successful companies conducting business across multiple continents need to balance of standardisation against customisation. Standard so often entails stand-still which is a death curse for companies. At the other end of the spectrum, few businesses can adopt a fully bespoke offering and hope to grow beyond their artisanal roots. There is another category, companies and sometimes just one-person [...]

China Literature – Approved for Investment

By |2018-06-08T13:52:53+00:00June 8th, 2018|Asian/emerging Equities, Cerno Capital Posts, Other Posts|

Newly approved Pacific & Emerging strategy stock: China Literature operates China’s largest online reading platforms, comprising 48% of the total online & mobile reading market with 191mn monthly users. The company hosts a proprietary library of 10.1 million literary works spanning 200 genres, generated by its 6.9 million writers online, for consumption online. Bypassing the traditional publisher model, popular titles are monetised through paid subscriptions and, increasingly, through licensed adaptations into other media formats including film & TV, web series, animations, games, and audio & physical books. Leveraging its scale, treasure trove of intellectual property and distribution capability, the company has entrenched itself at the centre of China’s literary ecosystem, connecting writers, readers and adaptation partners. China’s online literature market is expected to grow at +31% CAGR to 2020, having achieved a +45% p.a. growth between 2013-16. The wider Chinese entertainment market is also seeing robust growth (+14% CAGR to 2020). The domestic Chinese box office is set to overtake the US this year, giving rise to strong demand for high quality content.

FAQs on the Cerno Global Leaders Fund

By |2018-04-26T11:31:58+00:00September 20th, 2017|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Strategy|

Fay Ren compiles a glossary of questions asked in recent investor meetings and the related answers. Would you discuss your idea generation screen? Our permanent source of ideas is a screened universe of companies. We narrow the global universe of publicly listed companies by applying liquidity, size and profitability parameters. We also exclude banks, energy and basic materials companies given the leverage inherent in the former and commodity price sensitivity of the latter two groups. This screen provides a list of approximately 500 companies which are qualitatively reviewed for Global Leader characteristics. This list is not restrictive and analysts are free to generate ideas from multiple sources, however the screen ensures there is always a ready supply of ideas to work on. Do you have positive ESG filters?   We anticipate holding our companies for very long periods of time and therefore look for those businesses which embrace sustainable practices. While we have not set ethical screens, we have found that our positive screening rules out many of the sectors most associated with ethical screening, for example, our growth criteria rule the tobacco companies out of consideration. Do you invest in utility companies? We do not invest in utilities as [...]

China Tech: From Cubs to Pandas

By |2017-10-17T10:34:04+00:00March 24th, 2017|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Other Posts|

China’s technology sector, once a discretionary purchase within a regional portfolio, now deserves scrutiny. China is a place where Google, Facebook and Twitter simply do not exist. Their analogues do. In their place stand Baidu and Tencent. Alibaba is a much more significant concern than Amazon. The digital economy is thriving. E-commerce penetration has overtaken the US, as has mobile payments, led by Alibaba (AliPay) and Tencent (WeChat Pay), where the value of transactions dwarfs the US by nearly 50 times. The army of Chinese netizens pay for almost everything from goods and services to bills and insurance via one of the two payment systems available on a smartphone. The internet is one area where foreign brands do not possess any competitive advantage over indigenous brands. China’s netizens have never become accustomed to Google, Facebook, and Twitter. This is in part due to regulation: popular social media sites are often blocked by the “Great Firewall”, and Google left the country some years ago over censorship disputes. The latest to fold has been Uber, which decided to sell its local arm to Didi Chuxing, a Chinese competitor, after burning through billions of its investor money. Nor is this just a matter [...]

Ham & Eggs – our view of the proposed merger of Luxottica and Essilor

By |2017-10-17T10:34:40+00:00January 26th, 2017|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, Other Posts, Strategy|

Luxottica is a new addition to the Global Leaders portfolio. Italian sunglasses & frames maker Luxottica and French optical lens maker Essilor have announced a €46bn “merger of equals”. When it is completed, it will represent one of the largest cross-border deals attempted by European companies, and the news was well-received by the market. The stock of both companies rose +8% and +12%, respectively, on the day of the announcement. The marriage makes strategic sense, considering the highly complementary nature of the two businesses, which are already leaders in their respective fields. Luxottica is known for their strong brand portfolio: 7 proprietary brands including Ray-Ban and Oakley, and over 20 licensed designer brands incl. D&G, Bulgari, Chanel. They also have a notable retail presence including Sunglass Hut, LensCrafters, Sears Optical, among others. Its size dwarfs the next largest competitor Safilo (also Italian) by almost 6 times. Essilor, who controls over a quarter of the global lens market, also houses over 13 brands including Essilor, Varilux and Crizal. In recent years, the two companies have been tentatively treading onto each other’s turf, evidenced by Luxottica developing lens finishing techniques in-house and Essilor acquiring sunglass maker Costa and moving into online spectacle [...]

Less Cream, More Expensive

By |2016-09-06T15:24:40+00:00September 6th, 2016|Asset Allocation, Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts|

Cerno Global Leaders is a long term equity investment programme designed to identify and invest in high quality, defensible business franchises. We have been investing in an equal weighted portfolio of such stocks on behalf of investors since 2013. Results, to date, have been very encouraging and the portfolio has exhibited strong performance. The underlying process is very much tilted toward the research and identification stages with many possible candidates rejected along the way. To render a manageable list of candidates from the global equity universe of 68,000 listed companies, we apply a quantitative screen. To ensure sufficient liquidity, we screen for companies with a minimum market cap of US$2.5bn. We exclude highly leveraged sectors and deeply cyclical sectors such as banks, oil & gas, basic materials and mining. Positive profit histories and robust balance sheets are also requirements for inclusion. Note that past stock performance is not a criteria. This naturally gives the screened sample a high quality bias, which is reinforced at the next stage of the selection process. This leads onto the creation of an approved list of stocks, to be invested at the right valuation. With the universe defined, more rigorous qualitative assessment on selected candidates [...]

Feeling It – Sentiment and Markets

By |2016-03-08T12:48:19+00:00March 8th, 2016|Asset Class Returns, Cerno Capital Posts, Other Posts|

The potential to use investor sentiment as a gauge for future market trajectory is an appealing proposition. Sentiment is often cited as a contrarian indicator; excessive bullishness signals market exuberance poised for a reversal, whilst extreme bearishness may be the precursor to a market recovery. Such indicators are most useful when they are at extremes, and less so when the readings are neutral, which tends to be most of the time. The reason for assessing sentiment is that, when investors are extremely bullish, they tend to be fully invested, leaving little available cash to drive asset prices higher. On the other hand, when extreme bearishness prevails, the abundance of cash sitting in portfolios can be deployed to buy cheap assets, creating the foundation for a bull market. There are broadly two approaches to quantifying investor sentiment: attitude and activity. The former are typically surveys, gathered through proxies, of near-term expectations of active investors or market commentators. The second method maps risk appetite through trading activity, measured by asset flows, positioning and market volatility. In practice, the usefulness of these sentiment indicators for predicting stock market returns is somewhat uncertain. In this note we will examine a few of the most [...]

What Equity Indices Tell Us When They Get “Narrow”

By |2016-02-12T11:03:37+00:00February 12th, 2016|Asset Class Returns, Cerno Capital Posts, Other Posts|

The S&P 500 index peaked in late May 2015 at 2130, having enjoyed a seven year bull run. However, the current mix of strong dollar, weak oil and the peaking of the earnings cycle have pitched the US into bear market territory. The dip into bear te rritory was preceded by a narrowing of market breadth. In local currency terms, the S&P 500 index returned -0.73% on a price basis in 2015 (and 1.4% on a total return basis) however, this number is skewed by a handful of large entities. In particular, the new darlings of the tech industry: Facebook, Amazon, Netflix, and Google (collectively termed as the ‘FANGs’), together with Microsoft and General Electric, produced outsized returns which dominated index performance. These six firms contributed in excess of 100% of the index level return, as shown in the table below: Stock 2015 Performance Contribution to Index Return Netflix 134.4% 0.1% Amazon.com 117.8% 0.8% Alphabet (aka. Google) 45.3% 0.5% Facebook 34.2% 0.3% General Electric 27.5% 0.4% Microsoft 22.7% 0.5% Source: Bloomberg Upon closer scrutiny, we would find that fewer than half of the underlying stocks made a positive return during the same period. Stripping out the distorting effect of the [...]

Is the US Dollar Index Fit for Purpose?

By |2015-12-15T12:13:24+00:00December 15th, 2015|Cerno Capital Posts, General Investment, Other Posts|

The trade-weighted U.S. Dollar Index (DXY) is the de facto benchmark used to gauge the value of the US dollar devised by the ICE. The index is a weighted geometric mean of the dollar’s value relative to a basket of six currencies, where both the constituents and the weights have little changed since the series began in 1973, except to account for the creation of the Euro. The index can be decomposed as follows: Exhibit 1: The composition of the trade-weighted US dollar index (DXY) Currency Weight Euro 57.6% Japanese Yen 13.6% Pound Sterling 11.9% Canadian Dollar 9.1% Swedish Krona 4.2% Swiss Franc 3.6% Source: ICE The term ‘trade-weighted’, however, appears somewhat inappropriate on this occasion. For one, with the Euro accounting for nearly 60% of the index weight, it renders the DXY Index into a predominantly USD/EUR phenomenon, where the fate of the Euro has an outsized impact on the index value. For the period 1975-2015, the correlation coefficient between the two are as high as 0.98 based on monthly data (Exhibit 2), and on average, the EUR accounted for over two-thirds (69%) of the movements in the dollar index (Exhibit 3). Adding GBP, CHF and SEK into the [...]

Turkish Vulnerability

By |2015-09-10T13:25:03+00:00September 10th, 2015|Asset Class Returns, Cerno Capital Posts, Other Posts|

In recent weeks, China has dominated the headlines; in particular the recent stock market and currency volatility have sparked fear across global markets. Looking forward, we would highlight a less discussed market that has been concerning us in recent periods: - Turkey. Turkey is significant, due to the size of its economy (13th largest among OECD countries) and its geographical and economic proximity to Europe, which accepts circa 55% of its exports. Turkey is in a more vulnerable position than China in several ways: it runs one of the highest current account deficits in the EM universe owing to its dependency on short-term foreign funding to support the economy. Like its EM peers, Turkey has been a beneficiary of large foreign capital inflows, manifest in the significant external leverage built by its domestic corporate sector, masking its waning economic momentum. Gross external debt has doubled from pre-crisis levels to almost US$400 billion in Q1 2015. This  represents 50% of GDP, which, as noted by financial historian Russell Napier, exceeds the threshold of 30% where historically a country is more likely to default. In comparison, while China’s debt level is much higher in absolute terms, its ability to repay is stronger [...]