Cerno Capital Posts

Global Equity Markets – US versus Rest of the World

By |2019-12-03T14:48:05+00:00December 3rd, 2019|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Sectors & Corporate Performance|

Technology has been one of the best performing sectors in equity markets over the last 10 years, accounting for a significant portion of broader equity market performance. This phenomenon has been felt disproportionately in the US and has been backed by a strong relative earnings trend. Source: BCA  The increasing weight of Technology in the US, driven by earnings and upward rerating has been at the forefront of the trend for US equities and has pushed US performance versus the Rest of the World (RoW). Source: BCA We have gone back to test this phenomenon and to try to understand how much of a role momentum has played. Momentum, at its simplest expression, is the practice of picking winners by buying the winners. In the below-described test, we find that any combination of the largest listed US Tech companies of five years ago would have outperformed the market in the last five years. We took the largest 10 tech names from the S&P 500 from 5 years ago and used a Monte Carlo simulation (which generates a large number of random results subject to constraints) using 2,000 combinations of weights for the basket (with a 5-15% boundary restriction on individual [...]

Q&A from recent Global Leaders Breakfasts

By |2019-11-07T12:33:27+00:00November 7th, 2019|Cerno Capital Posts, Cerno Global Leaders, Events|

How do you contrast between picking companies and picking industries? The one is integral to the other. The obvious latch points are the companies but we always need to understand their environments. We own VISA and therefore it is necessary to have a view on the whole marketplace including MasterCard and to an extent American Express. The big tide here is the shift from credit to debit and how the rising mix of e-commerce is pulling returns up. The big existential risk is that a platform such as Alipay gains access and related technologies undermines the incumbents. Semiconductors is an example of an industry where competition has been winnowed down by virtue of the increasing capital costs of capex and R&D to compete at the cutting edge.  In 2000, 28 companies were capable of producing chips with the most advanced technology. Today that number is 3. We own Samsung and TSMC within the portfolio. The relentless ratchet in spending requirements is well illustrated by the cost to purchase the newest photolithography machines for EUV from ASML. These cost some 4x the prior generation. The next phase machines will cost 2x this again. The extremity of the technological frontier in semiconductors [...]

Holding in music royalty fund added to steady return basket in Select fund

By |2019-10-23T10:21:06+00:00October 23rd, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Manager Selection, Other Posts, Strategy|

We have introduced a new holding to the Select fund which delivers exposure to music royalties, an asset class which we have not previously been able to access. The Hipgnosis Songs Fund is a London listed investment trust which purchases, holds and manages songwriters copyright in popular music categories. The principal of the fund is Merck Mercuriadis who has been a successful manager of artists including Elton John, Beyonce, Morrissey and Gun ‘N Roses. He was previously the CEO of Sanctuary Records. Music royalties offer a long-term stream of cash flows to owners of music catalogues. Copyright lasts for seventy years from the date of death of the songwriter, or the last surviving collaborator with respect to jointly composed songs. Thus, songs are a very long duration asset which is typically defensive as music consumption is not impacted by the economic cycle. Royalty payments are generated every time a song is purchased, streamed, played on television or radio. Further, licence payments are made by media creators when they use previously recorded music within advertisements or films. Royalty collection must be managed efficiently by collection agencies and it is the job of song owners or managers to ensure that songs are [...]

Gold – Foul Weather Friend

By |2019-09-09T08:58:23+00:00September 9th, 2019|Asset Allocation, Asset Class Returns, Cerno Capital, Cerno Capital Posts, FX and Rates, General Investment, Strategy|

Sapiens rule the world because of stories. As the historian Yuval Harari convincingly sets out in his excellent series of books on the past, present, and future of humanity, stories are the real difference between us and chimpanzees. Stories are the glue that allow millions of strangers to organise and cooperate towards a common goal. Corporations, nations and money are all fictions. They do not exist outside the imagination of human beings. We believe in them, which give the concepts power. Gold is one of the most powerful stories in finance. Coveted in ancient cultures, it holds little intrinsic value in the modern age. Its industrial uses are limited, and it generates no yield for the holder. And yet, over centuries a story has been woven in which gold acts as the ultimate store of value. The universal reserve currency. This belief has survived innumerate tests. Isolating the period since 1982, when inflation was tamed, illustrates gold’s characteristics. It is hard to utilise as a buy and hold asset: underperforming US equities 69% the time. Outside of periods of anxiety, the underlying deficiencies of gold’s reality come back to the fore. However when it does perform, it tends to perform [...]

Portfolio changes to Cerno Global Leaders Strategy

By |2019-09-04T13:58:51+00:00September 3rd, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Strategy|

Over the summer months, we have made a number of changes to the Global Leaders portfolio. 3M and Reckitt Benckiser have been sold within the portfolio whilst Nidec, Microsoft and Philips have all been added. We profile the rationale for each below. 3M 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 [...]

Philips – Slimmer, lighter, healthier

By |2019-08-28T15:08:33+00:00August 28th, 2019|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders|

In 2017, Royal Philips, the Dutch company known for its lightbulbs and electric shavers, was reclassified into the Healthcare sector from Industrials, having undertaken a multi-year corporate transition to shift its portfolio from electronic goods to providing more personal and professional healthcare solutions. Once the largest European consumer electronics conglomerate, Philips was famous for its industrial and fundamental research, pioneering cutting-edge products from compact cassette recorders in the 1960s to integrated circuits and transistor technology in the 2000s. Many companies today share their roots with Philips, including the leading semiconductor equipment makers ASML and NXP; and Universal Studios, whose previous life as PolyGram (founded by Philips), was the largest global entertainment label in the 1970s. Despite being an innovation powerhouse, Philips made the classic conglomerate mistake of losing strategic focus owing to overdiversification, bloating its empire with unconnected low margin businesses. At its peak in the 1980s, Philips operated 13 major divisions and over 120 businesses across electronics, appliances, medical systems, entertainment, lighting, components and semiconductors, employing a massive workforce of 380,000 people. The indigestion was felt keenly when the company almost went into bankruptcy in the early 1990s. Its television tubes and lighting business was at risk of commoditisation [...]

Microsoft – Azure Skies

By |2019-08-28T15:06:36+00:00August 28th, 2019|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders|

“Whatever happened to Microsoft?” the Guardian[1] mused in August 2012. In some respects, this might have appeared an odd question. The company dominated the PC market via Office and Windows, while it also led in the corporate server market. At a market cap of US$220bn the company was still one of the biggest in the world. However, while its core business was nigh-on impregnable, strategic missteps had left it on the side lines of key consumer trends, most notably the smartphone and social media. In 2012, the iPhone brought in more revenue than all of Microsoft’s products. While the group held a small stake in Facebook its participation in the secular megatrend of interconnectedness was minimal. The most damaging factor was the speed of change. Apple had created the smartphone market from nowhere only 5 years earlier; Microsoft’s Steve Ballmer infamously declared at the time it had “no chance”. Facebook was about to welcome its billionth user 6 years after launch. Microsoft’s reaction function was to chase the pack, in all directions. The group embarked a series of misadventures including, acquiring Nokia for €7bn. This flailing added to the perception that Microsoft was a yesterday company. As the Guardian pointedly [...]

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 [...]