Asset Class Returns

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 [...]

Style Performance

By |2020-06-14T08:42:26+00:00June 14th, 2020|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Sectors & Corporate Performance, Strategy|

The rally in equity markets has extended into June, having recovered substantially from the depth of the March sell-off: The global equity index is -6.3% from its peak and the S&P 500  -5.4%, whilst the NASDAQ index has made new all-time highs. Despite the deepest economic downturn since the Great Depression, a dislocation between financial markets and economies has opened up as governments’ blend of monetary and fiscal policy initiatives has underpinned prices. Markets were highly discerning in the initial sell-off, less so since. In the initial phase, they rewarded visibility and stability and punished the opposite. Cross sectional return dispersion in different markets spiked, and volatility of price moves reached the highs recorded in the Global Financial Crisis of 2008 before easing in the second quarter. The concentration of performance in two sectors – Tech & Health Care – gave rise to extreme narrow market breadth, with the median company in the S&P 500 still underperforming the index by 15.7% year to date as at the end of May. Defensive quality companies that offer investors consolation in the form of revenue growth, profit retention, and financial resilience in their balance sheets and cashflows outperformed the market during this period. [...]

Global Equity Markets – US versus Rest of the World

By |2019-12-03T14:48:05+00:00December 3rd, 2019|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Sectors & Corporate Performance|

Technology has been one of the best performing sectors in equity markets over the last 10 years, accounting for a significant portion of broader equity market performance. This phenomenon has been felt disproportionately in the US and has been backed by a strong relative earnings trend. Source: BCA  The increasing weight of Technology in the US, driven by earnings and upward rerating has been at the forefront of the trend for US equities and has pushed US performance versus the Rest of the World (RoW). Source: BCA We have gone back to test this phenomenon and to try to understand how much of a role momentum has played. Momentum, at its simplest expression, is the practice of picking winners by buying the winners. In the below-described test, we find that any combination of the largest listed US Tech companies of five years ago would have outperformed the market in the last five years. We took the largest 10 tech names from the S&P 500 from 5 years ago and used a Monte Carlo simulation (which generates a large number of random results subject to constraints) using 2,000 combinations of weights for the basket (with a 5-15% boundary restriction on individual [...]

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 [...]

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 [...]

Cerno Capital receives 2017 Suggestus 3D Award

By |2017-10-17T10:34:18+00:00February 23rd, 2017|Asset Class Returns, Cerno Capital, Cerno Capital Posts, Other Posts|

Cerno Capital has received a Suggestus 3D Award for 2017 from Asset Risk Consultants (ARC). This award is an independent endorsement of the firm’s commitment to the principles of transparency, engagement and integrity, as recognised in ongoing service to clients. ARC have established a strict 3D Award framework consisting of a stringent set of criteria against which investment managers must measure up to in order to receive the accolade. Whilst investment managers are entered into the award process on completion of the ARC Due Diligence Questionnaire, they have to undergo a series of comprehensive analysis by the ARC Research Team against the 3D framework of which the award consists: Due Diligence, Data, Demonstration. ARC’s Manager Selection Research Team spend on average 30 hours collecting, analysing, questioning and feeding back to those managers as part of award methodology, working to truly understand the investment philosophy and process of a manager, and how this translates into the actual client experience. Crucially, the framework assesses actual client data as supplied by the investment manager rather than simply a share model or representative date. This is a key component of the award process, and as a minimum, investment houses must provide data on the [...]

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 [...]

We're All Builders Now

By |2016-11-30T15:01:26+00:00November 30th, 2016|Asset Class Returns, Cerno Capital Posts, Other Posts|

The world is guessing as to what parts of Donald Trump’s electioneering agenda he will deliver on. The much touted wall with Mexico has been downgraded to a partial fence. Mrs Clinton looks as if she will be able to enjoy her retirement outside a penitentiary. Even elements of the reviled “Obamacare” are to be retained. Having developed a reputation for unpredictability on the campaign trail, Mr Trump looks as if he will carry it forth into his presidency. There is one area, though, where we would be happy to make a judicious bet that there will be some delivery versus expectations and that is infrastructure spending. We believe this for several reasons. Firstly, it was area where two polar opposed candidates agreed upon. Both touted the need to spend on roads and bridges. Furthermore, the idea has common currency outside America and has been already proffered here in the UK: as a means to offset any hiatus in economic activity as a consequence of Brexit. Japan has been running similar programmes at elevated levels to address its own economic malaise for several years now. More recently China has sought to augment growth in this manner. What is more, we [...]

Global Financial Assets and the Trump Presidency

By |2016-11-09T10:47:05+00:00November 9th, 2016|Asset Class Returns, Cerno Capital Posts, General Investment, Other Posts, US|

Financial markets will struggle to adjust to what was a very possible, however largely unexpected and definitely undesired result. Between today and his inauguration on the 20th January, they will pay rapt attention to every utterance of President elect Trump. Already, we see a gulf between the rhetoric of the campaign and his acceptance speech which, for the large part, hit the usual magnanimous marks. This though was written by others and it was all too obvious where he extemporised: “it will be a beautiful thing”. It is not difficult to locate why this has happened in political historical terms. America is about to become a minority white country and many resent this. Nor were all ready for the Obama presidency. Real wages for all but the top echelons have stagnated since the early ‘80s, fostering disappointment over a generation. A large majority of the country is pessimistic about the prospects for their children and 69% of the population is either “angry” or “disappointed” with their politicians and political processes. In broad portfolio terms, looking beyond the snap reactions, the key question is whether this introduces a change of direction for the world economy and its financial asset classes. From [...]

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 [...]