Asset Allocation

FAQs on the Cerno Global Leaders Fund

By | 2017-11-13T17:16:40+00:00 September 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+00:00 September 6th, 2016|Asset Allocation, Asset Class Returns, Cerno Capital, Cerno Capital Posts, Cerno Capital Posts, General Investment|

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+00:00 November 13th, 2015|Asian/emerging Equities, Asset Allocation, Cerno Capital Posts, Cerno Capital 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+00:00 July 8th, 2015|Asset Allocation, Cerno Capital Posts, Cerno Capital Posts, Manager Selection|

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+00:00 June 17th, 2015|Asset Allocation, Cerno Capital Posts, Cerno Capital 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. 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 [...]

The Strain in Strine – Australian Macro

By | 2015-06-04T09:25:12+00:00 June 4th, 2015|Asian/emerging Equities, Asset Allocation, Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts, FX and Rates, Regions|

For the unconstrained global investor, Australia is a prospective hunting ground for profit. Any comprehensive analysis of the main trade and capital trends at work in the world find their conflux in Australia’s capital markets. Predicated on China’s fixed asset investment boom over the past quarter century, Australia’s economy has been substantially driven by demand for its ores and minerals. It relates uneasily, it seems at times, on account of deep cultural differences, to the rest of Asia, in particular Indonesia. Australia is an affluent, urbanised society. It is, above all, a consumerised population that is, in economic jargon, fully financially included. It has an independent central bank and currency. On account of these features, backed by disciplined capital markets and secure laws, Australia’s equities, government bonds and currency have been a destination for macro investors of all stripes, including hedge funds. We measure recent opportunities by looking at 12 month rolling returns of its currency, benchmark bond and main equity index. Source: Morningstar/Bloomberg When the currency is weakening, returns from key asset classes are crimped, as can be seen in the below chart. Source: Morningstar/Bloomberg The tricky thing with macro investing, prosecuted via Australian instruments, is the various counter [...]

Is It Time For Value?

By | 2015-06-02T14:39:35+00:00 June 2nd, 2015|Asset Allocation, Asset Class Returns, Asset Classes, Cerno Capital Posts, Cerno Capital Posts|

Within global equity markets, April saw value style indices outperform growth style indices. The relative return of one style versus the other would not typically be a significant event and the relative outperformance was just 1% according to the Russell Global Style Indices. However, the prolonged period of underperformance of the value style versus growth (a 5% difference over the last year and a 37% difference since 2005) and the associated headwind for equity investors with pronounced value style bias means that observers are in a mood to call for a change in trend. Can we observe a similar pattern in active manager universe data? For reliable style universe data we look to the Morningstar US large cap value and growth peer groups. The median value manager has underperformed the value and broad market indices over the last five years while outperforming over one and three months. Meanwhile the median growth manager has lagged the growth and broad market indices over the last month after a prolonged period of outperformance over the broad index (the median growth manager rarely outpaces the growth index). So perhaps we are onto something? It is important to remember that a value style index is [...]

Deflation Worries – A Case of Bad Semantics

By | 2015-06-02T14:20:53+00:00 June 2nd, 2015|Asset Allocation, Cerno Capital Posts, Cerno Capital Posts|

Comments surrounding the report of negative inflation for the UK are designed to insinuate that negative inflation does not equal deflation. One reason for this confidence is the recovery of the oil price, not present in these numbers, due to the lag between wholesale and petrol markets. Indeed, some commentators have gone far enough to suggest that deflationary worries have been quashed and that the ECB needs to be less committed to its unbounded plans of creating electronic money. Whilst we retain our belief that outright debt deflation is a low probability outcome, it is easy to conflate two distinct phenomena, leading to confusion of the issue. When commentators reference deflation, they sometimes mean a phenomenon more expressly termed debt deflation, balance sheet deflation or debt spiral. This only occurs as a consequence of a great rent in the fabric of financial infrastructure, accompanied by, or caused by, a systemic failure of the banking system to sustain liquidity and credit. Whilst this is indeed possible - and we brushed up against this outcome in 2008 - lined against it are society and government as it would be an anathema to both. The second, less pernicious phenomenon is a period of [...]

Passive Aggressive

By | 2015-02-05T09:57:06+00:00 February 5th, 2015|Asset Allocation, Asset Classes, Cerno Capital Posts, Cerno Capital Posts, Passives & ETFs|

I recently met Colin. He has the longest unbroken track record in the UK Equity Income sector. We did not talk about his Income fund; instead, we talked about his Blue Chip Equity Fund, which, notwithstanding a long track record has seen assets dwindle as investors joined the passive bandwagon – predominantly through Exchange Traded Funds (ETFs). Colin’s fund will be converted into a UK Rising Dividends Fund. The strategy makes a great deal of sense – focus on businesses with a track record of dividend growth and with the potential to maintain that growth. A set of rules whittle his universe down to a manageable list, then his experience and brain take over. The challenge for Colin is that the passive ferry may have already picked up his potential passengers. The growth in ETF-land is now focused on “Smart Beta”, “Factors” or “Advanced Beta”. The terminology proliferates as quickly as the number of ETFs. domain name search Total assets under management (AUM) in these products exceeds half a trillion dollars. If an active strategy can be defined by a set of rules using publicly available data, an index can be calculated and an ETF can be created to passively [...]

Disaster Scenario

By | 2015-01-30T10:19:31+00:00 January 30th, 2015|Asset Allocation, Cerno Capital Posts, Cerno Capital Posts|

The launch of QE by the ECB on January 22nd represents a milestone in the drawn out campaign against disinflation. With all the major Central Banks of the world having ‘deployed’, it is logical to begin to contemplate the consequences of failure in these monetary campaigns. Extending the military analogy to ISIS or the Taliban, one’s foe can prove more malicious and tenacious than anticipated. So of deflation, where the collapse in the price of oil surely skewers the thought that other vestiges of disinflation are just isolated events. In the instance of the failure of uncoordinated monetary easing we might expect coordinated money easing which, if that in turn fails, genuine helicopter money becomes the final barrage. This is the mechanism where deflation could flip to inflation in an uncontrolled manner. That disastrous phase can plausibly take us to a place where there is a general loss of confidence in money. We now rate the probability of this sequence of events as higher than zero. January 22nd of this year is a significant date: the ECB is now firing its bullets. Beyond these, there will be no more bullets other than the ones that, eventually and if they are [...]