Cerno Capital Posts

Portfolio changes to Cerno Global Leaders Strategy

By |2019-08-14T14:19:21+00:00August 14th, 2019|Cerno Capital Posts, Cerno Global Leaders, Global Leaders|

3M and Reckitt Benckiser have been sold within the portfolio and Nidec has been added. After many decades of impressive growth, we believe 3M now faces considerable pressure from lower quality substitution, powered by powerful retail and procurement platforms of  which Amazon is the most notable player. Secondly, 3M now has proportionately less growth opportunity than any time in its history – by geography and by market segment. Following a period of review, 3M has been sold from the Global Leaders portfolio. 3M is a somewhat unique company. Its corporate DNA is based on product invention and development across very wide product segments, appealing to both household and industry buyers. It has been at the vanguard of US companies pushing into a globalised world. It runs thousands of product lines across four divisions without seeming inchoate: safety & industrial (34% of group sales) , transportations & electronics (29%), health care (21%) and consumer (16%). Group sales total US$32bn, meaning that an additional US$1bn is needed to achieve 3% growth. This is a hard task in the world of materials where products can be readily substituted, in many cases. To some extent 3M is the victim of its own successes: its [...]

Cerno Capital Rounders 2019 with Greenhouse Sports

By |2019-08-01T13:45:14+00:00August 1st, 2019|Cerno Capital, Cerno Capital Posts, Events, Other Posts|

On Wednesday 31st July, we hosted our annual evening of Rounders and BBQ, with six teams joining us to battle it out in Regent’s Park. This year, we were thrilled to be partnering with Greenhouse Sports, a London based charity that uses sports coaching and mentoring to empower young people who are facing disadvantage to help them unlock their full potential. We had a number of the Greenhouse coaches join us on the evening to help show us the ropes, and join in on the pitches. We were lucky to have a dry evening after a few afternoon showers, and players and spectators soon got into the swing of the games. After some hotly contested matches, the Pink team (Farrer & Co) won the tournament by a ½ rounder, although there were some fantastic moments in all games that made for some very exciting play throughout the evening with plenty of fantastic catches and even a few full rounders.       Thanks to all of those who took part to make it such a great evening: BDB Pitmans, PAM, Seddons, Penningtons Manches, Farrer & Co, Withers, Canter Holland and of course, Greenhouse Sports. We have uploaded more photos taken [...]

Range by David Epstein – Cerno Capital Book of the Year 2019

By |2019-07-18T10:40:39+00:00July 17th, 2019|Cerno Capital Posts, Cerno Global Leaders, General Investment|

We have been reading the newly published book, Range, by David Epstein. The central argument of the book is a refutation of a well circulated theory that expertise in most fields can be attained by 10,000 hours of dedicated practice. This original theory is grounded in a 1993 paper co-authored by Anders Ericsson entitled The Role of Deliberate Practice in the Acquisition of Expert Performance1. Anders and his colleagues enjoyed considerable take-up of their core thesis with books on the subject authored by Malcolm Gladwell, Geoff Colvin and Daniel Coyle2. These books occupy a burgeoning section of non-fiction where sports meets self-improvement and cognitive science. Epstein opens the book by comparing Roger Federer to Tiger Woods. Woods might be considered an exemplar of the 10,000 hour rule – intensely coached by his father and associates from a very young age to become the second most successful golfer in the modern history of the game . Federer, by contrast, despite being the son of a tennis coach (mother in his case), was allowed to play all forms of ball sports into his teens and made the decision himself to begin to specialise in tennis, a full 10 years later than Tiger [...]

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 [...]

Miles Geldard, Cerno Capital Investment Advisory Committee Member, Appointed as Chairman of the Elephant Protection Initiative Foundation

By |2019-06-24T14:06:46+00:00June 24th, 2019|Cerno Capital, Cerno Capital Posts|

We are delighted that Miles Geldard, who sits on our Investment Advisory Committee, has been appointed as the CEO of the Elephant Protection Initiative (EPI) Foundation. The EPI is a leading anti-ivory trade campaign and lobby group bringing together 19 member states to spearhead initiatives to help member states raise money for and achieve their National Elephant Action Plans (NEAPs). These plans are designed to ensure a sustainable future for Africa’s elephants, and a better future for the people living alongside them. Miles has been a committed conservationist for decades, having moved out to Kenya following a career in finance during which he held numerous roles, including Chief Investment Officer at JP Morgan Asset Management, Adviser at the Central Bank of Botswana, and latterly as a Senior Advisor to Jupiter Asset Management. Miles has held a long interest in Africa - he is a trustee of Save the Elephants in Kenya, and helps to steer Hand in Hand International’s private sector outreach in Kenya. Miles commented, “I’m enormously excited by the opportunity to play such an important and unique role in elephant conservation. The EPI brings together an extraordinary range of African countries, united in their desire to save their [...]

BB Healthcare – being part of the solution

By |2019-06-05T10:38:15+00:00June 4th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Manager Selection, Strategy|

Healthcare offers a fertile hunting ground for investors with horizons beyond that of most market participants. In the search for companies capable of compounding earnings over long periods the unique secular demand underpinning the sector is a useful tailwind. Within Cerno clients’ portfolios we own companies in orthopaedics (Zimmer Biomet), pharma & technology (Johnson & Johnson and Waters) and post-operative care (Coloplast). 5 of the 27 stocks within our Global Leaders strategy are bracketed healthcare stocks with many more feeding their products and services into the supply chain. Newer, disruptive technologies are also represented in the Baillie Gifford Global Discovery Fund where healthcare represents 35-40%. Nevertheless, it is our observation that our investment footprint risks lagging the expanding opportunity set. As we set out in a recent missive, The New Ways, affordability is becoming an increasingly intransigent, and central issue for the effective delivery of healthcare. In the US healthcare spend is a colossal US$3.3tn, expanding at twice the rate of inflation. Traditional pharma has few tools in its locker to resolve the problem. The answer instead lies in a broad church of business, from medical technology (MedTech), to managed care, to healthcare IT. Technology often lies at the heart [...]

Renishaw Negotiates a Soft-Patch

By |2019-05-29T13:32:21+00:00May 29th, 2019|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Other Posts|

Renishaw, a UK engineering company held in the Global Leaders portfolio, held its annual Capital Markets Day on the 14th May in their Gloucestershire Innovation Centre, showcasing a selection of their machines. The company sells high precision measuring, gauging and calibration equipment to the high-end industrial and manufacturing sectors, enabling their customers to optimise processes and output, significantly reducing time and cost of production. Metrology has been core to Renishaw’s business since the founding of the company in 1973, when the original touch-trigger probe was invented by Sir David McMurtry, to test the integrity of finished aerospace components. Traditionally, finished parts are inspected at the end of the production line, if a defect is found, the entire batch is likely to be scrapped. For expensive components such as jet engine blades that cost northward of £250,000 a piece, this can become a costly undertaking. Exhibit: Renishaw Equator Gauging system next to a Fanuc Robodrill Source: Renishaw Renishaw’s value proposition to their customers is to integrate product inspection into the manufacturing process, tracking errors in real-time. Their probes and gauging systems are often found sitting alongside manufacturer’s machines on the factory floor. For instance, their flexible 5-axis probe (shown above), takes [...]

Nestlé – provenance and packaging

By |2019-05-21T09:59:38+00:00May 21st, 2019|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders|

As the largest food and beverage company in the world, Nestlé leaves a significant footprint on the markets it touches. While Nestlé is not a primary producer, it maintains close links with agriculture to establish provenance and guard against reputational risk associated with poorly chosen inputs. While its products are mostly consumed, the packaging used to deliver product is a material consideration – Nestlé is concerned both with the source materials of packaging and its disposal after use. The investment that Nestlé makes in both packaging technology and ingredient sourcing is a competitive advantage that allows it to maintain Global Leader status. Rather than simply observing the practices used by agriculture, Nestlé is an active participant in the development of new practices that improve productivity, crop quality and environmental practices. Nestlé achieves this via its network of Plant Science R&D centres and directly employed agronomists. Each year, the company processes 10% of the coffee and cocoa produced globally. For an example of a practical initiative we can look to Jardin in the Colombian Andes where Nestlé sources high quality coffee beans for Nespresso capsules. Traditional processing of coffee cherries involves on-farm fermentation to remove the outer shell with the waste [...]

ASML – pre-eminent in photolithography

By |2019-05-14T08:47:54+00:00May 14th, 2019|Cerno Capital, Cerno Capital Posts, Developed Equities, General Investment, Global Leaders|

ASML is the dominant supplier of photolithography tools for semiconductor manufacturers. Photolithography is the process of printing with light. In semiconductors it is the process whereby a light source is used to expose circuit patterns onto a wafer via a photomask. Photolithography has played a pivotal role in the evolution of semiconductors. It was Robert Noyce (future co-founder of Intel) at Fairchild Semiconductors in 1960 who saw the potential of the process to enable the printing of electronic circuits on flat, silicon wafers. This vision gave birth to the first integrated circuit and catalysed the race to ever smaller geometries in chip design. As transistor scale approaches the atomic level, the next limiting factor for the continuation of Moore’s Law1 is the wavelength of light. The shorter the wavelength, the smaller the scale in which a circuit can be printed. A radical reengineering of the lithography process is required. For the last 20 years ASML has been working on just such a radical solution. EUV or Extreme Ultraviolet lithography drops the wavelength of light from 193nm to 13.5nm enabling the extension of Moore’s Law through 2025. The payoff for this commitment of capital, and shouldering of risk, is 100% market [...]

Global Healthcare – The New Ways

By |2019-02-15T16:08:03+00:00February 15th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment|

Nothing is certain but death and taxes. To this Benjamin Franklin might have reasonably addended ‘but people’s desire to avoid both should not be underestimated’. Putting aside the morality of the latter the desire to maximise one’s health speaks to us all. It is this desire which has helped the healthcare sector to deliver enviable multi-year returns. Globally the sector has generated a total return of 9% p.a. since 2005, outperforming the broader market by over 2% p.a. Source: Bloomberg, world = developed markets But fortunes have not been evenly distributed. Beneath the surface the drivers of growth are shifting. Since the late ‘80s cash earnings for the broad healthcare space have exhibited a rising trend against the market, illustrating the unique secular demand underpinning the sector. However, the beneficiaries of this demand have rotated. Large cap pharma, often a heuristic for the sector, continues to dominate the market cap spectrum, but better growth is to be found elsewhere. This is reflected in starkly contrasting stock performance. Despite representing some 50% of the whole, pharma gained only 46% since 2012 (a CAGR of 6%) against the sector up 112% (CAGR: 13%). Distributable Cash Earnings - US Healthcare vs S&P 500, [...]