Bottom Up

China Tech: From Cubs to Pandas

By | 2017-10-17T10:34:04+00:00 March 24th, 2017|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Cerno Capital Posts|

China’s technology sector, once a discretionary purchase within a regional portfolio, now deserves scrutiny. China is a place where Google, Facebook and Twitter simply do not exist. Their analogues do. In their place stand Baidu and Tencent. Alibaba is a much more significant concern than Amazon. The digital economy is thriving. E-commerce penetration has overtaken the US, as has mobile payments, led by Alibaba (AliPay) and Tencent (WeChat Pay), where the value of transactions dwarfs the US by nearly 50 times. The army of Chinese netizens pay for almost everything from goods and services to bills and insurance via one of the two payment systems available on a smartphone. The internet is one area where foreign brands do not possess any competitive advantage over indigenous brands. China’s netizens have never become accustomed to Google, Facebook, and Twitter. This is in part due to regulation: popular social media sites are often blocked by the “Great Firewall”, and Google left the country some years ago over censorship disputes. The latest to fold has been Uber, which decided to sell its local arm to Didi Chuxing, a Chinese competitor, after burning through billions of its investor money. Nor is this just a matter [...]

Health Care Stocks – Accessing the Demographic Dividend

By | 2016-02-26T14:19:50+00:00 February 26th, 2016|Bottom Up, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, General Investment, Sectors & Corporate Performance|

In an endemically low growth world, prone to accelerating forces of disruption, it has become progressively harder to identify stocks to hold for the very long run. There is, though, a group of superficially boring healthcare stocks which are locked into long term palliative, chronic or geriatric pathologies where the demand profile is observably robust and their respective market positions pretty much unassailable. We hold six such companies within the Cerno Global Leaders Strategy, an equity investment program designed to identify and invest in companies for the very long term. The six are made up of three medical equipment suppliers, two chronic conditions specialists and one generalist. The healthcare companies we like have very simple, understandable products and services and are accessing large and growing patient pools. These companies typically operate in oligopolies where the competitive environment is relatively benign, where they are able to maintain stable market shares through high barriers to entry, switching costs and superior intellectual property, thereby sustain high margins for an extended period. We avoid complex and intangible businesses with high valuations and no proven cash generative abilities, for instance many new names in the biotech segment. A basic understanding of the key demographics is [...]

Japan – ROE is the Key

By | 2015-05-14T09:09:52+00:00 May 14th, 2015|Bottom Up, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, Regions|

Those who have seen our opinions on Japan will know that our arguments on expanding equity returns in the country are predicated on the condition that Japanese corporates implement reforms, aimed at increasing shareholder value. We like to think of long term investment as being evidential, and are therefore seekers of proof for our beliefs. We have already seen a string of positive developments. Most recently, Fanuc, a large cap Japanese robotics manufacturing business, has announced the hiring of an investor relations team. The company was previously known for purposefully avoiding shareholder contact. This is a significant development, with a 1.2% weight in the TOPIX index, Fanuc is leading by example. Other noteworthy changes include the reduction in cross shareholdings between companies, announcement of dividend increases and share buybacks. With the prominent launch of the JPX Nikkei 400 Index, one particular measure of shareholder value creation has been pushed into Japanese CEO’s spotlight – return on equity (‘ROE’). The index gives it a 40% weight in its selection criteria, besides operating profits (40%) and market capitalisation (20%), in arriving at its 400 constituents. ROE can be decomposed into three measures, according to an analysis first introduced by the DuPont Corporation [...]

Demand Shift – Japan Has a New Marginal Buyer

By | 2015-04-13T13:17:01+00:00 April 13th, 2015|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, Regions|

Last year, the Japanese Government Pension Investment Fund (GPIF) announced its intention to cut allocations to low yielding government bonds and to double its exposure to domestic equities. The logical pretext for this decision is the need to achieve higher returns to cover increasing pension payments to the country’s aging population. After decades of overweighting bonds - which benefitted from Japan’s deflationary environment - policy changes by Prime Minister Abe, set out to boost risk assets and to introduce inflation, gave this move further urgency. The new asset allocation came into effect on 31st October 2014. The table below outlines the extent of this change and alludes to the impact it had so far in monetary terms. Source: BCA Research, GPIF Data from BCA Research shows that the world’s largest pension fund, with total investable assets of Y138 trillion (US$1.14tr), has shifted close to US$90bn into domestic equities in the fourth quarter of 2014; still 5% (US$59bn) below its new target allocation of 25%. A further three Japanese public pension funds, managing assets in the region of US$250bn, are expected to follow suit this year. An estimated 13% increase to their allocation would add a further US$33bn in net new [...]

The morphing Apple

By | 2014-09-17T09:35:00+00:00 September 17th, 2014|Bottom Up, Cerno Capital Posts, Cerno Capital Posts, Developed Equities|

As ever, Apple’s product launches are greatly anticipated and 9th September was no exception. At that launch the iPhone 6, iPhone 6 Plus, Apple Watch, and an intriguing new payment platform, Apple Pay were revealed to the world. Thanks to its tightly integrated iOS ecosystem, Apple’s hardware tends to feel less commodity-like compared to its peers and, as a consequence of Apple’s integration in users’ lives, the explicit and implicit costs of switching mount. Its iPhones, iPads, iMacs, and the newest addition to the family, the Apple Watch, complement each other well by synchronising everything from apps to media (music, films and TV shows) to personal data (contacts, calendars, photos, etc.) through its iCloud and iTunes platforms. Apple’s ever growing application universe is a clear money-spinner. Given the typically short product replacement cycle of 2-4 years for personal electronics, building a loyal customer base is thereby essential to the success of the business over the long-term in this maturing and highly competitive market. It is generally thought that this loyalty lies on the sleek design, interface, simplification and sheer “wow” of their products. However, whilst the techies will froth on the screen size and resolution, the more meaningful business development [...]