Asset Allocation

Financial Robustness of the Cerno Pacific Portfolio

By |2020-02-05T15:34:36+00:00February 5th, 2020|Asian/emerging Equities, Asset Allocation, Cerno Capital, Cerno Capital Posts, Other Posts, Regions|

The emergence of the novel coronavirus (nCoV) has serious short term consequences for growth and demand in China. In this journal we address the financial position of the stocks in the TM Cerno Pacific portfolio and their revenue sensitivity to a protracted downturn in activity within China. The situation has naturally led to parallels being drawn with the SARS epidemic of 2003-04. While the pathologies are linked the context exhibits marked differences. At this stage of endemic spread, some caution is warranted when extrapolating outcomes for nCoV. In our recent Investment Letter, Camus and all that, we discussed these points of difference. China was just 5% of global GDP in 2003 vs 17% today. The measures put in place by the Chinese government, most notably the quarantining of entire cities, are more severe and restrictive than applied during SARs. Beijing’s approach to nCoV is akin to corpus calloscotomy, or split-brain surgery, whereby the link between the two hemispheres of the brain is severed to prevent the spread of seizures from one to another in patients with severe epilepsy. A drastic measure which is effective in its targeted goal but risks long lasting adverse consequences. Aside from the tragedy of human [...]

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 [...]

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 [...]

Gold – Foul Weather Friend

By |2019-09-09T08:58:23+00:00September 9th, 2019|Asset Allocation, Asset Class Returns, Cerno Capital, Cerno Capital Posts, FX and Rates, General Investment, Strategy|

Sapiens rule the world because of stories. As the historian Yuval Harari convincingly sets out in his excellent series of books on the past, present, and future of humanity, stories are the real difference between us and chimpanzees. Stories are the glue that allow millions of strangers to organise and cooperate towards a common goal. Corporations, nations and money are all fictions. They do not exist outside the imagination of human beings. We believe in them, which give the concepts power. Gold is one of the most powerful stories in finance. Coveted in ancient cultures, it holds little intrinsic value in the modern age. Its industrial uses are limited, and it generates no yield for the holder. And yet, over centuries a story has been woven in which gold acts as the ultimate store of value. The universal reserve currency. This belief has survived innumerate tests. Isolating the period since 1982, when inflation was tamed, illustrates gold’s characteristics. It is hard to utilise as a buy and hold asset: underperforming US equities 69% the time. Outside of periods of anxiety, the underlying deficiencies of gold’s reality come back to the fore. However when it does perform, it tends to perform [...]

Portfolio changes to Cerno Global Leaders Strategy

By |2019-09-04T13:58:51+00:00September 3rd, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Strategy|

Over the summer months, we have made a number of changes to the Global Leaders portfolio. 3M and Reckitt Benckiser have been sold within the portfolio whilst Nidec, Microsoft and Philips have all been added. We profile the rationale for each below. 3M 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 [...]

Microsoft – Azure Skies

By |2019-08-28T15:06:36+00:00August 28th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders|

“Whatever happened to Microsoft?” the Guardian[1] mused in August 2012. In some respects, this might have appeared an odd question. The company dominated the PC market via Office and Windows, while it also led in the corporate server market. At a market cap of US$220bn the company was still one of the biggest in the world. However, while its core business was nigh-on impregnable, strategic missteps had left it on the side lines of key consumer trends, most notably the smartphone and social media. In 2012, the iPhone brought in more revenue than all of Microsoft’s products. While the group held a small stake in Facebook its participation in the secular megatrend of interconnectedness was minimal. The most damaging factor was the speed of change. Apple had created the smartphone market from nowhere only 5 years earlier; Microsoft’s Steve Ballmer infamously declared at the time it had “no chance”. Facebook was about to welcome its billionth user 6 years after launch. Microsoft’s reaction function was to chase the pack, in all directions. The group embarked a series of misadventures including, acquiring Nokia for €7bn. This flailing added to the perception that Microsoft was a yesterday company. As the Guardian pointedly [...]

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 [...]

BB Healthcare – being part of the solution

By |2019-06-05T10:38:15+00:00June 4th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Manager Selection, Strategy|

Healthcare offers a fertile hunting ground for investors with horizons beyond that of most market participants. In the search for companies capable of compounding earnings over long periods the unique secular demand underpinning the sector is a useful tailwind. Within Cerno clients’ portfolios we own companies in orthopaedics (Zimmer Biomet), pharma & technology (Johnson & Johnson and Waters) and post-operative care (Coloplast). 5 of the 27 stocks within our Global Leaders strategy are bracketed healthcare stocks with many more feeding their products and services into the supply chain. Newer, disruptive technologies are also represented in the Baillie Gifford Global Discovery Fund where healthcare represents 35-40%. Nevertheless, it is our observation that our investment footprint risks lagging the expanding opportunity set. As we set out in a recent missive, The New Ways, affordability is becoming an increasingly intransigent, and central issue for the effective delivery of healthcare. In the US healthcare spend is a colossal US$3.3tn, expanding at twice the rate of inflation. Traditional pharma has few tools in its locker to resolve the problem. The answer instead lies in a broad church of business, from medical technology (MedTech), to managed care, to healthcare IT. Technology often lies at the heart [...]

Global Healthcare – The New Ways

By |2019-02-15T16:08:03+00:00February 15th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment|

Nothing is certain but death and taxes. To this Benjamin Franklin might have reasonably addended ‘but people’s desire to avoid both should not be underestimated’. Putting aside the morality of the latter the desire to maximise one’s health speaks to us all. It is this desire which has helped the healthcare sector to deliver enviable multi-year returns. Globally the sector has generated a total return of 9% p.a. since 2005, outperforming the broader market by over 2% p.a. Source: Bloomberg, world = developed markets But fortunes have not been evenly distributed. Beneath the surface the drivers of growth are shifting. Since the late ‘80s cash earnings for the broad healthcare space have exhibited a rising trend against the market, illustrating the unique secular demand underpinning the sector. However, the beneficiaries of this demand have rotated. Large cap pharma, often a heuristic for the sector, continues to dominate the market cap spectrum, but better growth is to be found elsewhere. This is reflected in starkly contrasting stock performance. Despite representing some 50% of the whole, pharma gained only 46% since 2012 (a CAGR of 6%) against the sector up 112% (CAGR: 13%). Distributable Cash Earnings - US Healthcare vs S&P 500, [...]

Equity Markets – Swords Drawn

By |2018-10-12T15:55:21+00:00October 12th, 2018|Asset Allocation, Cerno Capital, Cerno Capital Posts, Other Posts|

The sudden break-down in headline indices is stimulating a great deal of considered comment and a tweet or three from President Trump. The Fed’s fault? Well, in part. We summarise Governor Powell’s approach to monetary policy as “giddy up”: to temper the US economy during a period of extranormal growth and build some reserve for future cuts when the next crisis comes along. The second part has been referred to by past Governor Bernanke as “putting bullets in the gun”. In the very short term, portfolio managers of all stripes are assessing the collateral effects of this downward move in equity markets. Questions being asked are how is the dollar responding (down a bit), how is gold responding (up a bit), how is oil responding (down US$2bbl) and finally how is the US bond market responding (down a bit in capital value terms)? Measurement of these cross correlations allows people to assess whether the correction is a crisis - the very short-term conclusion being no. The more worrying combination would be a strong move upward in gold and downward in bond yields which would be reflective of actual cash flows out of equity markets into haven assets. This has not [...]