Asset Allocation

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 [...]

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 [...]

Going, Going, Gold

By |2018-05-03T15:44:24+00:00May 3rd, 2018|Asset Allocation, Asset Classes, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Strategy|

Our view on gold has changed recently and we have sold the positions in full across all portfolios. Gold has a few things going for it. It has had a prescribed value for thousands of years – stemming directly from the fact that it was, for much of the past three millennia, a medium of exchange, a savings product - in effect a currency. In 1971, when the US finally came off the gold standard, the direct link between paper currencies and gold was lost. Forty years is a relatively short time in a period measured in centuries, so institutional and personal memories of the linkage remain strong. However, Gold is an example of a putatively safe asset which is, on investigation, not reliable in all environments. Gold is not necessarily a beneficiary from higher inflation, as is commonly thought. The price of gold demonstrates no stable statistical relationship with the measured rate of inflation. No matter whose CPI series one adopts, the relationship is unstable by virtue of the very large swings in the gold price. The case for believing that gold offers a very long run store of value is not well constructed. In face of these inconvenient [...]

Inflation Linked Bonds – Why They Don’t Work (In All Situations)

By |2018-03-27T09:22:33+00:00March 27th, 2018|Asset Allocation, Cerno Capital Posts, General Investment, Other Posts|

The first inflation linked bond (or linker) was launched in 1780 by the Massachusetts Bay Company. Although inflation was a much less understood or easily measured concept back then, the need for inflation protection has been acutely felt since the inception of financial markets. Inflation linked bonds (ILBs) only came into investor consciousness properly however post their introduction in the 1980s by the UK DMO and in 1997 by the US Treasury. This resulted in the most liquid inflation linked bond market of today the US$500bn (notional) US TIPs market. TIPs stand for Treasury Inflation Protected Securities. To contextualise the issues of ILBs we must appreciate that their pricing dynamics are essentially the same as nominal bonds. That is to say, the market determined price of a nominal bond is the collection of its cash flows (fixed coupon x principal) and principal repayment, all discounted to the present value via relevant discount rates. Following from this, the sole differentiating technical factor between nominal and ILBs is that the inflation linked bond receives an adjustment to coupons and principal value (paid at maturity) based on an inflation tracking index (typically CPI). Because of this, ILBs (to some degree) suffer or benefit [...]

Investment Letter Feb 2018 Cobras in the Basket

By |2018-05-15T09:41:15+00:00February 5th, 2018|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Investment Letters, Strategy|

Cobras in the Basket: Bonds, their curves, their relationship with equities and market tops In the last two months, we have seen a meaningful rise in bond yields. Key maturities in the US curve have crept up. The 2Y US Treasuries now stand at 2.15%, the 5s (5 years maturity) have moved up to 2.53% and the 10s to 2.73%. This has not been accompanied by any visible change in central bank policy or rhetoric. It is our belief that investors should take heed and begin to adjust their portfolios, if they have not already done so. This is not the first time in the post crisis period (a period that will soon be 10 years long) that bond yields have fluttered. During the so called “taper tantrum” that occurred between February 2013 and January 2014, those same maturities ran up considerably: 5s went from 0.63% to 1.86% and 10s 1.62% to 2.80%. There were other noticeable sell offs after the post 2008 low. The 10s moved from 2.0% points in early 2009 only to crest at 4.0% in 2010. As we can see, in those previous periods, yields then proceeded down, with the curve compressing to new lows. [...]

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 [...]

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 [...]

Japan – Restructuring of Positions

By |2015-11-13T11:37:02+00:00November 13th, 2015|Asian/emerging Equities, Asset Allocation, Cerno Capital Posts, Other Posts|

Japanese equity, which has been a consistent allocation within our client portfolios since 2011, now stands at a twenty percent weight. Within this allocation, the precise expression has changed over time. Our approved list provides us with the necessary toolkit to alter allocations in response to changing drivers of the Japanese stock market. At present, half of our Japanese allocation is to the Lyxor JPX Nikkei 400 tracker. This ETF is assembled of companies, predominantly large caps, which score favourably on a shareholder value creation ranking. The Japanese equity market is attractively valued and we anticipate further improvement in return on equity (ROE), which currently averages nine percent across the corporate universe. With his triumvirate of ‘arrows’, Japanese Prime Minister Abe introduced measures to reform corporate governance and refocus corporate attention to the shareholder. These aim to prompt companies to allocate capital more efficiently and target returns on equity above the cost of capital, or to return cash to investors in form of higher dividends and share buybacks. To encourage companies to adhere to these principles, the Japanese Exchange Group (JPX, world’s third largest bourse operating the Tokyo Exchange amongst others) and Nikkei have jointly created the JPX Nikkei 400 [...]

Active Management: Identifying Outperformance

By |2015-07-08T09:32:04+00:00July 8th, 2015|Asset Allocation, Cerno Capital Posts, Manager Selection, Other Posts|

At Cerno Capital, we believe in a) the ability of some managers to outperform and b) our ability to identify them. The track record of outperformance of our approved list is contained in the below chart. Against this, we entirely concede the point being made repetitively by academics and journalists alike that the average active manager does not outperform an appropriate index by a significant margin. It is, though, an error to conjure this observation into a theory that markets are “efficient” and therefore an indexed approach is appropriate. That the “average manager” does not produce returns which are statistically different from the appropriate index is hardly a surprise. This average manager is typically highly constrained in terms of the level of benchmark relative risk taken (no bad thing given an average level of ability) and must incur the costs of implementation not applied to benchmark indices. Faced with the choice of allocating capital to the average manager or a passive index tracker, the choice of the latter is understandable, albeit a significant compromise. Study of the evidence of manager returns reveals that there are a small number of active managers in some market segments who are able to generate [...]

Defining Megatrends: Demographics & Debt

By |2015-06-17T11:04:58+00:00June 17th, 2015|Asset Allocation, Cerno Capital Posts, Other Posts, Strategy|

When investors talk of long-term trends, they are often referring to the next three to five years. Few envisage horizons past the ten year mark. Yet super long-term trends do exist and are slowly but definitively changing the world socially, economically and politically. In our minds, some of the largest of these are demographics, debt, the technology of energy provision and gene based medical discoveries. We address the first two, which represent more of a threat than opportunity, in a chart book. https://cernocapital.com/wp-content/files_mf/1434122306LTSS_DemographicsDebt.pdf The world is getting older. This is a topic that has been acknowledged and fretted over by academics, economists and governments, whilst relatively little can be done on a supra-state basis. In the recent past, people worried about world population exploding to unmanageable levels, which at the time seemed realistic. They noted that the world’s population doubled twice in the 20th century. However, future demographic shifts in many countries from today will be driven by longevity and low fertility rates. This will lead to a sharp fall in working population relative to retirees and eventually lead to a decline in overall numbers as the fertility rate is on trend to fall below the replacement rate (2.1 children per [...]