James Spence

About James Spence

James is a co-founder of Cerno Capital and lead manages a number of the firm’s collective and private portfolios. After qualifying as a chartered accountant in London (Coopers & Lybrand, 1989) he relocated to Asia. Between 1991 and 2004 he worked as an equity analyst, head of research, and latterly as an equity strategist at WI Carr, Paribas, HSBC and UBS, based variously in Hong Kong, Singapore and Jakarta. James graduated from the University of St Andrews, Scotland with an MA in Philosophy & Logic in 1986. James is a Member of the Chartered Institute for Securities & Investment.

Thoughts on a Crisis: James Spence answers some questions

By |2020-04-09T12:22:00+00:00April 9th, 2020|Cerno Capital, Cerno Capital Posts|

In this series, members of the Cerno team reflect on the crisis and provide detail on their work and domestic lives. For our first interview, we caught up with James Spence, Managing Partner and Portfolio Manager, to hear how he has been coping and adapting to life during this time: Have your close connections been affected by the disease? A close friend of mine died on 29th March in the Mount Sinai Hospital in New York. We’re of the same age and had similar careers since being part of the 1986 intake at Coopers & Lybrand. He had a mordant sense of humour, telling people on the week of his COVID-19 test it was the only positive thing that happened to him all week. He was very sick by that time. I will miss him. What do you think are the longer-term consequences for the UK/Global societies? I’m ambivalent on this. One the one hand, health care provision will be looked at critically and the obvious gaps between the have and have nots (within each society and between nations) will draw more compassionate responses from those already so minded. On the other hand, one of the underestimated functions of human [...]

Global Leaders balance sheet further strengthened

By |2020-03-09T11:09:50+00:00March 9th, 2020|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment|

Last week, we reorganised the Global Leaders portfolio to reduce implicit leverage. Four companies have been sold: FedEx, Oracle, Rockwell and Waters. Capital released from these names has been recycled into all the other portfolio holdings. The net effect of these changes is to improve the financial backing of the portfolio and net debt to equity falls from 25% to 20% as a consequence. The actual improvement is a little better than this as Waters has a negative equity balance due to share buy-backs and therefore does not submit to conventional debt to equity analysis. Whilst we considered this action, we looked also at debt service levels. Although none of the companies we own are in any way constrained on their ability to service debt, we have taken a very conservative measure in light of the widespread effects of the spread of the coronavirus. As the fund is fully invested at all times, the net reallocation further emphasises financial strength in a portfolio that already had good characteristics in this regard. Whilst it is unusual for one factor to dominate a multi-factor investment process, it will happen on occasion and the coronavirus is an exceptional phenomenon. Should the virus scare [...]

Investment Letter dated 29th January 2020 – Camus and all that

By |2020-02-05T12:43:40+00:00January 29th, 2020|Asset Allocation, Cerno Capital, General Investment, Investment Letters, Regions|

The outbreak of Novel Coronavirus (2019-nCoV) in Wuhan revives memories of the 2002-3 SARS virus which broke out of Guangdong province and was responsible for 648 deaths in Hong Kong and China and 127 deaths elsewhere in the world. It should not be forgotten that more deadly epidemics have taken place between these two viral outbreaks, namely H1N1, Ebola and MERS. The writer was a resident of Hong Kong in 2002 and can recollect the palpable fear that beset the territory at that time. Even when its lethal nature was acknowledged (following several months of attempted cover up by the central authorities) protocols at hospitals remained inadequate in the rush to treat patients. Doctors, nurses and orderlies worked in the knowledge they were at great risk of contracting the virus which at that time was a great deal more fatal than the eventual, overall fatality count. We remember them. Before SARS came along, Hong Kong was betwixt the horns of two deflationary events: falling property prices and an equity bear market – in sync with the rest of the world – following the Tech stock boom of the 1990s. Just when things couldn’t seem to get worse, one of Hong [...]

Q&A from recent Global Leaders Breakfasts

By |2019-11-07T12:33:27+00:00November 7th, 2019|Cerno Capital Posts, Cerno Global Leaders, Events|

How do you contrast between picking companies and picking industries? The one is integral to the other. The obvious latch points are the companies but we always need to understand their environments. We own VISA and therefore it is necessary to have a view on the whole marketplace including MasterCard and to an extent American Express. The big tide here is the shift from credit to debit and how the rising mix of e-commerce is pulling returns up. The big existential risk is that a platform such as Alipay gains access and related technologies undermines the incumbents. Semiconductors is an example of an industry where competition has been winnowed down by virtue of the increasing capital costs of capex and R&D to compete at the cutting edge.  In 2000, 28 companies were capable of producing chips with the most advanced technology. Today that number is 3. We own Samsung and TSMC within the portfolio. The relentless ratchet in spending requirements is well illustrated by the cost to purchase the newest photolithography machines for EUV from ASML. These cost some 4x the prior generation. The next phase machines will cost 2x this again. The extremity of the technological frontier in semiconductors [...]

Portfolio changes to Cerno Global Leaders Strategy

By |2019-08-14T14:19:21+00:00August 14th, 2019|Cerno Capital Posts, Cerno Global Leaders, Global Leaders|

3M and Reckitt Benckiser have been sold within the portfolio and Nidec has been added. After many decades of impressive growth, we believe 3M now faces considerable pressure from lower quality substitution, powered by powerful retail and procurement platforms of  which Amazon is the most notable player. Secondly, 3M now has proportionately less growth opportunity than any time in its history – by geography and by market segment. Following a period of review, 3M has been sold from the Global Leaders portfolio. 3M is a somewhat unique company. Its corporate DNA is based on product invention and development across very wide product segments, appealing to both household and industry buyers. It has been at the vanguard of US companies pushing into a globalised world. It runs thousands of product lines across four divisions without seeming inchoate: safety & industrial (34% of group sales) , transportations & electronics (29%), health care (21%) and consumer (16%). Group sales total US$32bn, meaning that an additional US$1bn is needed to achieve 3% growth. This is a hard task in the world of materials where products can be readily substituted, in many cases. To some extent 3M is the victim of its own successes: its [...]

Range by David Epstein – Cerno Capital Book of the Year 2019

By |2019-07-18T10:40:39+00:00July 17th, 2019|Cerno Capital Posts, Cerno Global Leaders, General Investment|

We have been reading the newly published book, Range, by David Epstein. The central argument of the book is a refutation of a well circulated theory that expertise in most fields can be attained by 10,000 hours of dedicated practice. This original theory is grounded in a 1993 paper co-authored by Anders Ericsson entitled The Role of Deliberate Practice in the Acquisition of Expert Performance1. Anders and his colleagues enjoyed considerable take-up of their core thesis with books on the subject authored by Malcolm Gladwell, Geoff Colvin and Daniel Coyle2. These books occupy a burgeoning section of non-fiction where sports meets self-improvement and cognitive science. Epstein opens the book by comparing Roger Federer to Tiger Woods. Woods might be considered an exemplar of the 10,000 hour rule – intensely coached by his father and associates from a very young age to become the second most successful golfer in the modern history of the game . Federer, by contrast, despite being the son of a tennis coach (mother in his case), was allowed to play all forms of ball sports into his teens and made the decision himself to begin to specialise in tennis, a full 10 years later than Tiger [...]

What is Japanification?

By |2019-07-17T13:55:49+00:00July 17th, 2019|Asset Allocation, Asset Class Returns, Asset Classes, Cerno Capital Posts, Developed Equities|

An ugly word - even if it is a word - but what is Japanification? The central idea behind the word is that an economy loses altitude in its growth trajectory for an extended period. It is associated with low interest rates, low inflation and high government indebtedness. The extent to which these factors are causal agents, or just the side effects of, is hotly debated by economists. The notion that the economic of the future of the world might resemble that of Japan in the past 25 years took flight following a speech by Larry Summers at the IMF in 2013. Larry Summers is an economist who was Treasury Secretary in the US Government during the tenure of President Clinton. His speech featured the following section: “Yet, in the four years since financial normalization, the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009.  And the American experience of dismal economic performance in the wake of financial crisis is not unique, as Ken Rogoff and Carmen Reinhart’s work has documented.  Japan provides a particularly clear example.   I [...]

Investment Letter dated 19th June 2019

By |2019-06-19T16:21:40+00:00June 19th, 2019|Cerno Capital, General Investment, Investment Letters|

The approaching half year mark is a good time to gauge the health of world financial markets. 2019 has been better than 2018. World equities fell -7.4% in 2018 in local currency terms and have risen +15.9% YTD in 2019. World Bonds (in aggregate, using the JP Morgan composite) fell 1.0% in 2018 but have returned +4.7% so far this year (data to 18th June). It therefore appears that 2018 was a pause for consolidation, permitting the full-bore late cycle rally that has since transpired. If we have enjoyed rising bond and equity prices in this most recent period, how rare of an event is this? Looking back over the last 35 years to 1984, we observe that, in 26 of those heady years bonds and equities have risen in tandem. There have been no years in which they both fell, six years in which equities fell and bonds rose, the rarest instance being the three years in which equities have risen and bonds have fallen, the last one of these being 2013. We can see, at a glance, why balanced investment (a non-determinate mixture of bonds and equities) has been such a hoot. There is considerable and understandable anxiety [...]

Investment Letter dated 6th February 2019

By |2019-02-06T11:38:44+00:00February 6th, 2019|Cerno Capital, General Investment, Investment Letters, Other Posts|

The MSCI EAFE Index is an index of performance of world shares, ex US. EAFE stands for Europe, Australasia, Far East. This index is often used as a benchmark for US pension fund allocators whose traditional view of the world is divided by US allocations and International allocations. EAFE Equity mandates are granted to invest in shares anywhere in the world, excluding the US. Performance is measured against the MSCI EAFE Index. US$2.2tn is managed this way. The reason for displaying this is to understand the trend in global equity markets, outside the US. The Index, captioned below by the blue line, achieved a recent peak on the 25th of January 2018 and has fallen 16.7% from that peak until the time of writing. The wider All Country ex US (the green line which includes Emerging Markets) peaked on the same day and has fallen 16.3% since then. This data includes the January rally. In simple terms, the world, ex US, has marginally escaped the bear market territory (defined as a 20% fall in an index) which it entered on 17th December. The bigger picture is that the world is slowing, although not abruptly and not currently in the US. [...]

Internals: The Study of Market Conditions

By |2018-11-23T12:28:01+00:00November 22nd, 2018|Investment Letters|

It has been our view for some time that the biggest issue confronting financial markets has been the markets themselves. The change in mood in equity markets has been both sudden and impactful. This Letter unpicks some of the terminology used in shorthand to identify causal factors in the correction. The study of and commentary on market conditions is sometimes called internals or dynamics. We field a number of technical terms and explain each as we go. When financial markets break-down the finger tends to be first pointed at fast money. Fast money was once loosely approximated to hedge funds where the dominant investment style is assumed to be short term and twitchy. In truth, fast money is a much broader amalgam of investment styles. It also includes quantitative investment. These strategies use powerful computer driven analysis to jockey on trends, mainly price trends. Quantitative strategies hop onto positively performing price trends whilst simultaneously shorting negatively performing price trends and when the variables change, the model buys and sells accordingly. There is a general suspicion, not fully proven, that the growth in quantitative styles amplifies market moves at points of stress. Curators of quantitative funds will counter-argue “Ah, but we’ve [...]