Asset Class Returns

Cerno Capital receives 2017 Suggestus 3D Award

By | 2017-10-17T10:34:18+00:00 February 23rd, 2017|Asset Class Returns, Cerno Capital, Cerno Capital Posts, Cerno Capital 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+00:00 February 7th, 2017|Asset Class Returns, Cerno Capital Posts, Cerno Capital 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+00:00 November 30th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital 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+00:00 November 9th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts, General Investment, 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+00:00 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 [...]

The Passive Fallacy

By | 2016-09-06T13:18:00+00:00 September 6th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

The growth of passive investment strategies has been supported by a narrative that active management should be shunned in favour of the passive approaches which have disrupted the investment management landscape. We at Cerno remain ardent supporters of well-considered, properly implemented active approaches to investment. Our position is based on our own experience of investing and of our time spent observing active investment managers and the development of passive, or rules based approaches. The potential rewards to a successfully implemented active investment strategy are significant and are perhaps best exhibited through the example of a savings plan for a new born child. Assuming the parent of a child born in 2016 is willing to make the requisite JISA and ISA contributions and that child is subsequently able to continue with contributions to the age of 65, the uplift from an active approach results in a potential doubling of income in retirement. Chart 1 demonstrates this clearly by assuming a 4% nominal annualised return from a passive approach and a 6% nominal annualised return from an actively managed approach. These assumptions compare with the average return assumption of 7.6% taken by US Public Pension Plans. These assumptions appear reasonable and correspond [...]

The Robotic Chauffeur: ethics and the adoption of driverless cars

By | 2016-03-30T15:18:12+00:00 March 30th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

In our recent article for Citywire magazine ‘Fundmanagers as Futurologists’, we analysed how technological developments in the automobile, payments and energy industries influence our investment choices. In this article we further investigate the auto sector and the prospects for the driverless car. Valentine’s Day can be problematic for many of us, but for one company this year it was a complete car-crash. Not only did Google’s self-driving car collide with a public bus, but, for the first time in history, the car itself was deemed partially responsible[1]. Robotics has been influencing the way we travel for decades:  the birth of the aeroplane auto-pilot function in 1912 and London’s very own driverless Docklands Light Railway (DLR) being just two examples. The most recent developments in such technologies mark a turning point: firms such as Google and Tesla are now developing cars with no need for drivers to actually touch the steering wheel, or in some cases the abolition of the steering wheel and pedals altogether– symbolising the first steps towards the transition from autonomous to self-driving vehicles[2]. Fig. 1: Pedal-less and steering wheel-less: Google's self-driving car (2014)[3] The potential benefits of self-driving cars are far-reaching. With respect to safety:  it [...]

Feeling It – Sentiment and Markets

By | 2016-03-08T12:48:19+00:00 March 8th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

The potential to use investor sentiment as a gauge for future market trajectory is an appealing proposition. Sentiment is often cited as a contrarian indicator; excessive bullishness signals market exuberance poised for a reversal, whilst extreme bearishness may be the precursor to a market recovery. Such indicators are most useful when they are at extremes, and less so when the readings are neutral, which tends to be most of the time. The reason for assessing sentiment is that, when investors are extremely bullish, they tend to be fully invested, leaving little available cash to drive asset prices higher. On the other hand, when extreme bearishness prevails, the abundance of cash sitting in portfolios can be deployed to buy cheap assets, creating the foundation for a bull market. There are broadly two approaches to quantifying investor sentiment: attitude and activity. The former are typically surveys, gathered through proxies, of near-term expectations of active investors or market commentators. The second method maps risk appetite through trading activity, measured by asset flows, positioning and market volatility. In practice, the usefulness of these sentiment indicators for predicting stock market returns is somewhat uncertain. In this note we will examine a few of the most [...]

‘I’m not done yet’ vows Peter Pan Pendleton

By | 2016-02-24T10:15:18+00:00 February 24th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts, Press & Media, Women’s Sport in Britain|

This article was first seen on The Mixed Zone - the women's online sport magazine After her untimely fall on her jumps debut at Fakenham racecourse aboard odds-on favourite Pacha du Polder, Victoria Pendleton’s dreams of riding at the Cheltenham Festival are hanging in the balance. The Mixed Zone’s Laura Winter spoke to her after the race about the reasons behind her desire to become a jump jockey Victoria Pendleton readily admits she achieved more on a bike than she dreamed she would. Her illustrious cycling career, spanning more than twenty years, embraced nine world titles and three Olympic medals – including two golds. She also picked up a Commonwealth title in 2006 and two European golds in 2011. She was a poster girl for Great Britain during those two glorious weeks in the summer of 2012 when the Olympic Games came to London. And after winning a gold in the keirin and a silver in the sprint, to add to her sprint gold in Beijing in 2008, Pendleton retired. A tumultuous, emotional and world-beating career on the track had come to an end. But what next? Suddenly she felt lost. She missed the sense of purpose and focus that had for so long dominated her [...]

What Equity Indices Tell Us When They Get “Narrow”

By | 2016-02-12T11:03:37+00:00 February 12th, 2016|Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

The S&P 500 index peaked in late May 2015 at 2130, having enjoyed a seven year bull run. However, the current mix of strong dollar, weak oil and the peaking of the earnings cycle have pitched the US into bear market territory. The dip into bear te rritory was preceded by a narrowing of market breadth. In local currency terms, the S&P 500 index returned -0.73% on a price basis in 2015 (and 1.4% on a total return basis) however, this number is skewed by a handful of large entities. In particular, the new darlings of the tech industry: Facebook, Amazon, Netflix, and Google (collectively termed as the ‘FANGs’), together with Microsoft and General Electric, produced outsized returns which dominated index performance. These six firms contributed in excess of 100% of the index level return, as shown in the table below: Stock 2015 Performance Contribution to Index Return Netflix 134.4% 0.1% Amazon.com 117.8% 0.8% Alphabet (aka. Google) 45.3% 0.5% Facebook 34.2% 0.3% General Electric 27.5% 0.4% Microsoft 22.7% 0.5% Source: Bloomberg Upon closer scrutiny, we would find that fewer than half of the underlying stocks made a positive return during the same period. Stripping out the distorting effect of the [...]