Better not look down, Better not look down, If you want to keep on flying. Put the hammer down, Keep it full speed ahead. Better not look back Or you might just wind up cryin’. You can keep it moving, If you don't look down “Better Not Look Down”, Sample & Jennings, BB King, 1979 Perhaps your analyst has a cultural proclivity to look down too often. Certainly there have been no rewards in financial markets, at least since Q1 2016, for those not prepared to put the hammer down. Whether gauged by low cash levels in pension funds and mutual funds, high margin levels, low short interest levels or extinct volatility, all the evidence is that the hammer is down. Meanwhile, far below – so far it seems that even those occasionally glimpsing down cannot see it – a liquidity crisis is developing that is likely to become an emerging market debt crisis. Since Q1 2013 this analyst has been pointing out that the debtors of Turkey are likely to default. They may indeed be forced to do so if their government were to impose capital controls. Mass defaults have not occurred, though Turkey’s largest ever private sector default [...]
It is rare for investment managers to write about investment management fees. Like the artist who struggles to describe his ceramic pot in monetary terms, high quality investment managers prefer to build portfolios that deliver client objectives while leaving fees to their business colleagues. Investment management services are typically charged for by one of two methods. The most common is to charge a fixed percentage of assets managed for example, 0.75% per annum. This fee is set at a level which covers the costs of the investment manager and which also delivering a profit to the owners of the business. Critics point out that the manager earns his fee, and presumably a profit, regardless of the success of the strategy. To determine this, one needs to be clear on the investment objective. All investment managers should be able to express what their investment objective is. Under a flat fee scale the value of the fee shrinks when portfolio values fall and rises on growth. If increasing the value of an investment portfolio is the objective, this way of charging seems to align interests quite well. The second way of charging is to explicitly tie the fee earned to the performance [...]
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 [...]
On November 1st, Cerno Capital will launch a concentrated, low turnover, global equity fund, TM Cerno Global Leaders. The strategy has been active in client accounts since 2013 and target 25-30 holdings are identified via proprietary research from our investment team. In the captioned podcast, Lead Manager James Spence explains the underlying thinking and portfolio structure and protocols which we believe make it a unique offering in the global equity sphere. Listen to the podcast here, or using the player below.
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 [...]
Luxottica is a new addition to the Global Leaders portfolio. Italian sunglasses & frames maker Luxottica and French optical lens maker Essilor have announced a €46bn “merger of equals”. When it is completed, it will represent one of the largest cross-border deals attempted by European companies, and the news was well-received by the market. The stock of both companies rose +8% and +12%, respectively, on the day of the announcement. The marriage makes strategic sense, considering the highly complementary nature of the two businesses, which are already leaders in their respective fields. Luxottica is known for their strong brand portfolio: 7 proprietary brands including Ray-Ban and Oakley, and over 20 licensed designer brands incl. D&G, Bulgari, Chanel. They also have a notable retail presence including Sunglass Hut, LensCrafters, Sears Optical, among others. Its size dwarfs the next largest competitor Safilo (also Italian) by almost 6 times. Essilor, who controls over a quarter of the global lens market, also houses over 13 brands including Essilor, Varilux and Crizal. In recent years, the two companies have been tentatively treading onto each other’s turf, evidenced by Luxottica developing lens finishing techniques in-house and Essilor acquiring sunglass maker Costa and moving into online spectacle [...]
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 [...]
In an ideal world, an investment portfolio would deliver a total return in excess of that of the risk-free rate (e.g. Gilts) without taking any additional risk at all. Sadly, that is not possible. The pursuit of excess returns, or “alpha”, forces us out of traditional risk-free asset classes into riskier areas of the market. Riskier could mean many things, including less liquid (how easy something is to sell), leveraged (borrowing to accentuate returns) or more volatile. Volatility measures the dispersion of returns for a given investment, which means that a higher volatility investment could deliver a very good month in terms of performance, followed by a very significant loss in the next. This also has the effect of making timing a far more critical decision. Luckily, there is a commonly used method for calculating the risk-adjusted return of an investment, called the Sharpe Ratio. This is the average return earned in excess of the risk-free rate per unit of volatility (or risk). Therefore, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return. Granted, the Sharpe Ratio does not take into account liquidity, leverage or other forms of risk, but it does act as a [...]