Cerno Capital

What does credit default pricing tell us about the cycle?

By |2018-11-23T12:55:49+00:00November 23rd, 2018|Cerno Capital, Cerno Capital Posts, Credit, General Investment|

Credit risk is the risk that companies do not repay their debts. This risk can be measured and traded. CDX IG is an index comprising the 125 most liquid single name Credit Default Swaps (CDS) in the investment grade space in the US. The most commonly traded tenor point is 5 years and the index is refreshed by the provider every 6 months to maintain maturity and liquidity profile of the underlying names. We are currently on series 31 (meaning the index has been running in one form or another since 2002-2003). The index is quoted in terms of basis points and a quote represents the annual cost of insuring a notional amount of the underlying assets (as a simple approximation). For example; with CDX IG NA currently trading at 78bps (0.78%) an investor paying to insure US$10mn for 5 years would pay US$78,000 annually. In return for this insurance premium they would be made whole (minus the recovery rate) in the event of any defaults during the period, proportionate to the size of the constituent. On the flip side, the seller of such a contract would receive US$78,000 annually whilst being on the hook for the above obligations. These [...]

Nick Hornby wins the Outstanding Achievement Award at the Spear’s Wealth Management Awards 2018

By |2018-11-07T11:52:39+00:00November 7th, 2018|Cerno Capital, Cerno Capital Media Mentions, Cerno Capital Posts|

On Tuesday 6th November, Nick Hornby was awarded the top award at the Spear’s Wealth Management Awards 2018, held at The Dorchester. The Outstanding Achievement Award is the highest reward that Spear's give out at what has come to be known as the UK’s “financial Oscars”. The awards celebrate the very best in wealth management, private banking and law, acknowledging innovation, success and outstanding contributions to  wealth management and beyond. Presenting Nick with his award, the judges commented that, “[Nick is] a person of top quality, a fantastic ambassador for the industry doing something really different. A standout, praising his huge credibility”. We are delighted that Nick’s dedication to Cerno Capital’s investors over the past 11 years has been recognised by our peers.

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 [...]

Outside In: Discover at Cerno Capital

By |2018-09-28T10:49:05+00:00September 28th, 2018|Cerno Capital, Cerno Capital Posts, Events, Other Posts|

Outside In and Cerno Capital are pleased to present Outside In: Discover, an exhibition celebrating artwork by three Outside In artists. Outside In was founded in 2006 at Pallant House Gallery and became an independent charity in 2016 following a highly successful decade. The award-winning charity works to provide a platform for people who face significant barriers to the art world whether due to health, disability, social circumstances or isolation, and currently supports 2,600 artists. We were able to collaborate with Outside In for this exhibition, displaying colourful works that are varied in style and representative of artists from diverse backgrounds reflecting Outside In’s inclusive ethos. All three exhibiting artists create work with strong, vibrant imagery, each with a very unique and distinct practice. Nnena Kalu works in an obsessive and determined way to develop a range of work with an underlying approach of a systematic layering. In the works on display, she uses repetitive lines which she draws in circular motion, responding to the rhythm and noise of creating the work. Once she has applied a painted background, she creates repeated lines with a circular motion, frequently following the same route to create heavily worked into vortex shapes and [...]

Cerno Capital awarded HK Connect status

By |2018-09-26T10:05:55+00:00September 25th, 2018|Cerno Capital, Cerno Capital Posts, General Investment, Other Posts|

Following several months of work, we have been awarded HK Connect status which allows us to invest in Shenzhen and Shanghai listed ‘A’ shares (formerly known as local stock). The ‘stock connect’ link between China’s mainland markets and Hong Kong relaxes restrictions that historically split the Chinese stock market between shares targeted at local investors and those available to international investors. The link was first launched in 2014 between Shanghai and Hong Kong. In late 2016 it was further extended to include the burgeoning, technology hub of Shenzhen. It allows mainland Chinese to purchase shares listed in Hong Kong and lets foreigners buy China A shares listed on the mainland. This vastly expands the range of possible investments we can make in the world’s most exciting economy. Fay Ren, Co-Manager of TM Cerno Pacific & Emerging comments: “The A-share market is more than twice the size of the H-share market, giving us access to a wealth of new ideas to explore. There are some real gems in the mix and we are thrilled with the opportunity to find and own them, in particular the more tech oriented entrepreneurial names that are little known outside the country”. Goldman Sachs, with whom [...]

Investment Letter – September 2018

By |2018-09-10T13:27:54+00:00September 10th, 2018|Cerno Capital, Investment Letters|

The current economic and stock market cycles are unusually long in duration and this leads to obvious questions about what will be the cause of its ending. There are several oft mentioned candidates: protectionism, a fall in historically high margins, a strong dollar and interest rates or some combination of these factors. Students of stock market valuation over time are liable to point to how highly valued equities are and this is hard to dispute. To our minds, the biggest threats to the US stock market lies within the international (non-US) outlook combined with shifts in demand for equities and their valuation. The valuation observation is notoriously difficult to narrow down in a causal sense and apply to time frames. Current high valuations are a pointer to sub-normal returns over the medium term but not the short term. Specifically, they tell us something, in a probabilistic sense, about how returns will pan out over a seven-year time frame, not a one-year time frame. (This is what our own testing has shown). Considerations of the net-demand for equities is thinly trampled terrain for the equity market analyst. It is common place in bond circles to speak of such things – they [...]

The Custom Option

By |2018-07-11T08:54:19+00:00July 9th, 2018|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Investment Quarterly, Other Posts, Strategy|

Conducting big business in the decades following the industrial revolution normally entailed the marshalling of labour and resources in a profitable sinecure. Fur trappers and tin miners, agriculture and energy, railroads and steel all fit this model. These industries persist today but are becoming scarce in the pantheon of very top companies measured by market capitalisation or economic value addition. Labour has mobilised, a thicket of laws exists to prevent excessive exploitation and monopolies of international scale are prohibited. Only perhaps in the world of software and social media have we seen the kind of recently accrued market share power that breeds exploitative practices: Microsoft’s dominance of operating system software is a matter of historic fact and Facebook’s control of the network effect across its platforms are prime examples of predatory corporate behaviour: rabid until checked. Outside these large and unusual cases, successful companies conducting business across multiple continents need to balance of standardisation against customisation. Standard so often entails stand-still which is a death curse for companies. At the other end of the spectrum, few businesses can adopt a fully bespoke offering and hope to grow beyond their artisanal roots. There is another category, companies and sometimes just one-person [...]

Cerno Capital sponsors Team PCD in the Maidstone to Monaco Rally, 2018

By |2018-07-05T10:59:55+00:00July 5th, 2018|Cerno Capital, Cerno Capital Posts, Other Posts|

We were delighted to recently support David Bell, PCD Club, and Fraser Dyer, FED London, as they undertook the Maidstone to Monaco Rally in aid of the Parenta Trust, who build schools and provide education for pre-school children in Uganda.  Participants in the Rally have built 6 schools in the last 6 years, providing opportunities to some of the world’s poorest families. This year, the Rally group have raised £16,000 for the cause, which will provide education for 150 children. David and Fraser documented their journey over the Alps, which they share with us below: On Wednesday 27 June, 7 cars left Maidstone with a goal of getting to Monaco and back via the Swiss Alps in 5 days. The twist was that cars have to be bought for less than £500 and are decorated, coming in all shapes and sizes.  On our trip was an ancient Volvo covered in carpet; a Land Rover with 250,000 on the clock and a Vauxhall Corsa that was about to be scrapped.  Our car was a convertible 1997 MG MGF with 153,000 on the clock, easily the best car there!  We were kindly sponsored in our mission by Cerno Capital and a couple [...]

A short Investment Letter from Rome – May 2018

By |2018-06-01T08:27:41+00:00June 1st, 2018|Cerno Capital, Investment Letters|

The writer first visited Italy in 1983 and experienced the ochre strade of Florence on a tight budget. Caffè was taken al banco non al tavolo. A fruit cake from home served for lunch so an evening meal could be taken in a restaurant. It did no harm and sparked a deep affection for the place that will last this life. Italy is an effervescent place to visit but a deeply frustrating place to be a national of. It took many years and the wry books of Tim Parks to realise this. With more acquaintanceships, especially that of young Italians, the disfunction of the place became apparent. The narrowness of opportunity is a shock when compared to, for example, the UK. The most recent plot of youth unemployment was 31.7%, the second worst in the G20. Italians themselves will often point out that they have not been a country for long and in many respects the place still aligns to stati della città (city states). The preminent of which being Rome, where dark arts are practiced. Given the institutional stasis, ossified professional cabals and general sense that politics is a game for the rich played by the rich, it is [...]

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 [...]