FergusShaw

About Fergus Shaw

Fergus surveys the full range of the firm’s investments on a bottom up basis and is principally engaged in manager and security selection. He began his investment career at Valu-Trac Investment Management in 1995, where he worked in their global equity and asset allocation products. He worked for Russell Investments as a Portfolio Manager of UK equities (2001-2006) and Asian equities (2006-2009). Fergus graduated from Edinburgh University with a BCom (Hons), holds the CFA charter and is a member of the CFA Society of the UK. Fergus is a Director of the Salters’ Management Company.
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Dividends: Please sir, can I have some more?

By |2020-06-16T15:16:58+00:00June 16th, 2020|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Sectors & Corporate Performance|

The legal relationship between the joint stock company and its shareholders deems that the only thing to which an equity investor is entitled is the dividend that a board of directors sees fit to declare. An equity investor in today’s environment is likely to be experiencing the immediate pain of dividend cuts or cancellations. This requires the equity holder to revisit the investment thesis – a task made more challenging by the lack of comparative periods on which to draw reference. While some businesses are able to continue to operate with modest levels of disruption in the current environment, others have experienced a complete halt in operational activities and attendant revenues. These companies must prioritise near term survival in capital allocation decisions. To be clear, the declaration of a dividend is a capital allocation decision. It matters not that a particular company has a long and aristocratic history of dividend payments. Each year, management must determine whether to retain all profits or whether to take a portion of profits that could be retained and spoon them into the begging bowls of shareholders. Readers of Dickens might compare some shareholders with Oliver Twist. The UK has one of the strongest dividend [...]

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Holding in music royalty fund added to steady return basket in Select fund

By |2019-10-23T10:21:06+00:00October 23rd, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Manager Selection, Other Posts, Strategy|

We have introduced a new holding to the Select fund which delivers exposure to music royalties, an asset class which we have not previously been able to access. The Hipgnosis Songs Fund is a London listed investment trust which purchases, holds and manages songwriters copyright in popular music categories. The principal of the fund is Merck Mercuriadis who has been a successful manager of artists including Elton John, Beyonce, Morrissey and Gun ‘N Roses. He was previously the CEO of Sanctuary Records. Music royalties offer a long-term stream of cash flows to owners of music catalogues. Copyright lasts for seventy years from the date of death of the songwriter, or the last surviving collaborator with respect to jointly composed songs. Thus, songs are a very long duration asset which is typically defensive as music consumption is not impacted by the economic cycle. Royalty payments are generated every time a song is purchased, streamed, played on television or radio. Further, licence payments are made by media creators when they use previously recorded music within advertisements or films. Royalty collection must be managed efficiently by collection agencies and it is the job of song owners or managers to ensure that songs are [...]

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Nestlé – provenance and packaging

By |2019-05-21T09:59:38+00:00May 21st, 2019|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders|

As the largest food and beverage company in the world, Nestlé leaves a significant footprint on the markets it touches. While Nestlé is not a primary producer, it maintains close links with agriculture to establish provenance and guard against reputational risk associated with poorly chosen inputs. While its products are mostly consumed, the packaging used to deliver product is a material consideration – Nestlé is concerned both with the source materials of packaging and its disposal after use. The investment that Nestlé makes in both packaging technology and ingredient sourcing is a competitive advantage that allows it to maintain Global Leader status. Rather than simply observing the practices used by agriculture, Nestlé is an active participant in the development of new practices that improve productivity, crop quality and environmental practices. Nestlé achieves this via its network of Plant Science R&D centres and directly employed agronomists. Each year, the company processes 10% of the coffee and cocoa produced globally. For an example of a practical initiative we can look to Jardin in the Colombian Andes where Nestlé sources high quality coffee beans for Nespresso capsules. Traditional processing of coffee cherries involves on-farm fermentation to remove the outer shell with the waste [...]

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Cerno Capital to Vote Against Proposed Acquisition of JLIF

By |2018-09-25T16:08:04+00:00September 7th, 2018|Asset Allocation, Cerno Capital Posts, General Investment, Other Posts|

Update: On the 24th of September, the shareholders of JLIF voted to determine the future of the trust. The turnout displayed a disappointing level of shareholder apathy with just 54% of the available votes being cast. Of the votes cast, 85% voted in favour of the takeover. The shares of JLIF will cease to trade on the 28th of September. Attention will now shift to other listed vehicles that may prove attractive to private capital. Such capital appears to be willing to operate with lower discount rates than the public markets deem prudent. The John Laing Infrastructure Fund Limited is a holding in Cerno multi-asset portfolios due to the attractive characteristics of the infrastructure assets it owns – principally, long term inflation linked cash-flows deriving from availability-based payments on socially and economically important infrastructure assets. On the 16th of July, the Board of John Laing Infrastructure Fund Limited (JLIF) announced that following an unsolicited approach from a consortium of Dalmore Capital Limited and Equitix Investment Management Limited (the Consortium), discussions were continuing over a Possible Offer to purchase the entire shareholder capital of JLIF at a price of 142.5 pence. On the 3rd of August, the possible offer became a [...]

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New Energy – The Way the Wind Blows

By |2018-06-08T13:56:57+00:00June 8th, 2018|Cerno Capital Posts, Other Posts|

In his autobiography, “The Way the Wind Blows”, former prime minister Alec Douglas-Home recounted bucolic childhood memories of Scottish summer holidays with each day’s activities determined by the direction of the wind. That wind is increasingly viewed as part of the solution to society’s need for a sustainable source of electricity. Critics of wind power were understandably numerous, when faced with the prospect of the spread of futuristic turbines across wild places. Perhaps, like Home might, they fear for the plight of game birds and the visual pollution that on-shore wind farms bring. Technical and operational hurdles for on-shore wind farms include the unreliability of on-shore wind speeds and wind shadow – the phenomenon of wind strength depletion downstream of a turbine. There is also the question of availability of suitable sites. Like raindrops on sun-bleached rock, these concerns evaporate when wind turbines are placed off-shore. Off-shore wind is more reliable, which means more consistent energy generation and average wind-speeds are higher which permits the use of bigger turbines and therefore greater energy generation capacity. The UK is at the front of the pack of nations building off-shore wind infrastructure. In 2017, the UK generated 15% of its electricity requirement [...]

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The Price Paid

By |2017-11-13T17:09:15+00:00October 10th, 2017|Cerno Capital, Cerno Capital Posts, General Investment, Other Posts|

It is rare for investment managers to write about investment management fees. Like the artist who struggles to describe his ceramic pot in monetary terms, high quality investment managers prefer to build portfolios that deliver client objectives while leaving fees to their business colleagues. Investment management services are typically charged for by one of two methods. The most common is to charge a fixed percentage of assets managed for example, 0.75% per annum. This fee is set at a level which covers the costs of the investment manager and which also delivering a profit to the owners of the business. Critics point out that the manager earns his fee, and presumably a profit, regardless of the success of the strategy. To determine this, one needs to be clear on the investment objective. All investment managers should be able to express what their investment objective is. Under a flat fee scale the value of the fee shrinks when portfolio values fall and rises on growth. If increasing the value of an investment portfolio is the objective, this way of charging seems to align interests quite well. The second way of charging is to explicitly tie the fee earned to the performance [...]

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Electric Wheels

By |2017-10-17T10:35:45+00:00July 14th, 2017|Cerno Capital Posts|

The sport of cycling has, since James Moore won a 1,200-meter race in 1868 at the Parc de Saint-Cloud, been dogged by the willingness of riders and their minders to administer stimulants or other medical products to gain an advantage. Riders doping strategies have come a long way from the consumption of cocaine, caffeine and strychnine cocktails to the more modern techniques of altering blood composition. A rider’s heart and lungs are typically referred to as the “engine”. To-date, there have been no biological advances to provide an extra engine within the body. However, engineering has provided riders with the opportunity to engage a “second engine”. The term given is “mechanical doping”. The practice is simple – a small electric motor, along with a battery is secreted within the frame and connected to the drive mechanism providing the cyclist with assistance at opportune moments in a race. While electrical assistance is a black art in racing circles, it is visibly flaunted on the cycle-superhighways and bridleways frequented by commuters and off-roaders respectively. E-bikes, Pedelecs, EPACs – call them what you want – sales of electrically assisted bicycles are growing faster in than e-vehicles. Electrical assistance can allow the commuter to [...]

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Patient Capital Outperforms – are you fishing in the right pond?

By |2017-10-17T10:33:39+00:00June 6th, 2017|Cerno Capital Posts|

While investment manager returns can be observed on an ex poste basis, the more important question is whether managers with a high probability of success can be observed on an ex ante basis. Our response is that they can. There are key characteristics that we see repeatedly across excellent investors. The first characteristic is one that surprises many casual observers of the investment problem. When investing in companies or buildings or lending money “active” should not imply activity. The ability to trade successfully and the ability to invest rarely reside in the same person or team. Excellent investors are patient, methodical people who think about the development of a business in terms of years rather than the development of a share price over minutes. Contrast this with the quick minded trader, taking advantage of market psychology on the demand and supply of paper assets. While the popular image of an investment floor involves Bloomberg terminals, flashing lights, phones tucked into bent necks and much shouting, the Cerno investment team sits in an environment not dissimilar to a library. Some of the great investment teams we speak to boast of the absence of Bloomberg terminals on their investment floors. The result [...]

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Risky thoughts

By |2017-10-17T10:34:14+00:00March 3rd, 2017|Cerno Capital Posts, General Investment, Other Posts, Strategy|

The investment world can be split into many camps, but, in discussions of risk, owners and custodians of capital, their agents, academics, analysts and journeymen pitch their tents firmly in one of two camps. In one field we have those for whom risk means the probability of a permanent loss of capital which would cancel all hope of achieving an investment objective. This group will oft reference the Sage of Omaha, Warren Buffet, who has been robust in his observation that risk is not synonymous with the preferred definition of the other camp – volatility. In business school classrooms, university lecture halls and many of the world’s largest asset managers it has been standard practice to use volatility, or the “spikiness” of a price chart, as a proxy for the risk of a tradeable asset, sector or asset class. The use of volatility stems from the study of the role markets play in setting the price of individual assets in the short term. It is the role of markets to rapidly assimilate information and establish a price. The mechanism by which this is achieved is the assessment of future returns by a myriad of market participants, each of whom will [...]

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Investment Benchmarks – Utility, Clarity, Applicability

By |2017-10-17T10:34:26+00:00February 7th, 2017|Asset Class Returns, Cerno Capital Posts, Other Posts|

When the owner of capital engages the services of professionals to manage that capital, an investment management agreement (IMA) should state an investment objective.Said IMA will also describe a benchmark against which the change in value of the capital may be compared to evaluate the ongoing progress of the manager in delivering the investment objective. What makes for an appropriate benchmark? It goes without stating that the benchmark should correlate with the objective. Institutional equity mandates which are tightly defined in terms of region, sector or company size have been guided by four tenets, namely an appropriate benchmark is :- Composed of constituents that are known in advance of any valuation day Measureable Investable Representative of the chosen asset class While these requirements are suitable for single asset class benchmarking exercises and, by extension, permit a passive implementation option, we can draw on them when thinking about a benchmark for a multi-asset class portfolio. The requirement for a benchmark to be constructed of constituents that are known in advance excludes the use of peer groups and allows for a full understanding of the risks being run in a given portfolio. It goes without saying that any yardstick must be measureable [...]

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