Cerno Capital Posts

Investment Letter – February 2018: Cobras in the Basket

By | 2018-02-12T11:05:37+00:00 February 5th, 2018|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Investment Letters, Strategy|

Cobras in the Basket: Bonds, their curves, their relationship with equities and market tops In the last two months, we have seen a meaningful rise in bond yields. Key maturities in the US curve have crept up. The 2Y US Treasuries now stand at 2.15%, the 5s (5 years maturity) have moved up to 2.53% and the 10s to 2.73%. This has not been accompanied by any visible change in central bank policy or rhetoric. It is our belief that investors should take heed and begin to adjust their portfolios, if they have not already done so. This is not the first time in the post crisis period (a period that will soon be 10 years long) that bond yields have fluttered. During the so called “taper tantrum” that occurred between February 2013 and January 2014, those same maturities ran up considerably: 5s went from 0.63% to 1.86% and 10s 1.62% to 2.80%. There were other noticeable sell offs after the post 2008 low. The 10s moved from 2.0% points in early 2009 only to crest at 4.0% in 2010. As we can see, in those previous periods, yields then proceeded down, with the curve compressing to new lows. [...]

Outside In Artwork at Cerno Capital: ‘Crufts Dog Show’ by Michelle Roberts

By | 2018-01-30T16:50:16+00:00 January 30th, 2018|Cerno Capital, Cerno Capital Posts, Cerno Capital Posts|

We were delighted to attend an exhibition held recently at Sotheby’s with Outside In. Outside In: Journeys brought together the diverse work of a number of the artists involved with Outside In, a charity that provides a platform for artists facing a barrier to the art world for reasons including health, disability, isolation or social circumstance. The exhibition epitomised the charity’s objective to create a fairer art world – challenging traditional values and institutional judgements about whose artworks can and should be displayed. The body of work varied hugely throughout the show and brought to life many of the stories and experiences from the artists. On the hugely busy opening night, every work visually captivated each guest. We were particularly taken with the work by Michelle Roberts, whose colourful work Crufts Dog Show (below), will shortly be hanging on our office walls. Crufts Dog Show, Michelle Roberts Michelle has drawn and painted throughout her life, and as a young girl she used to accompany her grandfather, a watercolour painter, who often worked outdoors. She spends much of her free time drawing small, intricately worked images in her sketchbooks, as well as ideas for the canvases she produces. Michelle [...]

2017 Performance Summary

By | 2018-01-09T15:06:00+00:00 January 8th, 2018|Cerno Capital, Cerno Capital Posts, Cerno Capital Posts, Cerno Global Leaders, Global Leaders|

2017 Performance Summary Performance summaries for the main investment strategies, all numbers after fees. Note past performance is not a guide to future performance. Global Multi-Asset TM Cerno Select and its sister fund Cerno Unconstrained are global strategies investing across multiple asset classes with an unconstrained approach to asset allocation. The return target is UK CPI +3% by investing in an approved range of investment vehicles, including direct securities, passive funds and specialist active managers. Fund/Strategy 2017 3 Year Inception** Annualised since inception** TM Cerno Select +8.0% +18.9% +62.2% 4.9% CPI +3%* +5.7% +14.1% +71.5% 5.5% *Dec-17 CPI calculated using 3.0% YoY forecast**Strategy inception October 2007: EF Global prior to September 2013, TM Cerno Select thereafter Global Equity The Global Leaders Equity Strategy invests in global companies with sustainable competitive advantages delivering above average returns. Its target is to deliver performance above that of the MSCI World Total Return (GBP) Index on a 3-year rolling basis. The fund will hold 25-30 securities, equally weighted, selected according to a distinct investment thesis that accents industry structure, the sustenance of return on capital and secular growth. [...]

Turkey: You Better Not Look Down

By | 2017-11-17T12:29:59+00:00 November 17th, 2017|Cerno Capital, Cerno Capital Posts, Cerno Capital Posts, General Investment|

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 [...]

The Price Paid

By | 2017-11-13T17:09:15+00:00 October 10th, 2017|Cerno Capital, Cerno Capital Posts, Cerno Capital Posts, General Investment|

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 [...]

FAQs on the Cerno Global Leaders Fund

By | 2017-11-13T17:16:40+00:00 September 20th, 2017|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Strategy|

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 [...]

Cerno Global Leaders – The Podcast

By | 2017-10-17T10:30:22+00:00 September 15th, 2017|Cerno Capital, Cerno Capital Posts, Cerno Capital Posts, Cerno Global Leaders, General Investment, Strategy|

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.

Electric Wheels

By | 2017-10-17T10:35:45+00:00 July 14th, 2017|Cerno Capital Posts|

The sport of cycling has, since James Moore won a 1,200-meter race in 1868 at the Parc de Saint-Cloud, been dogged by the willingness of riders and their minders to administer stimulants or other medical products to gain an advantage. Riders doping strategies have come a long way from the consumption of cocaine, caffeine and strychnine cocktails to the more modern techniques of altering blood composition. A rider’s heart and lungs are typically referred to as the “engine”. To-date, there have been no biological advances to provide an extra engine within the body. However, engineering has provided riders with the opportunity to engage a “second engine”. The term given is “mechanical doping”. The practice is simple – a small electric motor, along with a battery is secreted within the frame and connected to the drive mechanism providing the cyclist with assistance at opportune moments in a race. While electrical assistance is a black art in racing circles, it is visibly flaunted on the cycle-superhighways and bridleways frequented by commuters and off-roaders respectively. E-bikes, Pedelecs, EPACs – call them what you want – sales of electrically assisted bicycles are growing faster in than e-vehicles. Electrical assistance can allow the commuter to [...]

Patient Capital Outperforms – are you fishing in the right pond?

By | 2017-10-17T10:33:39+00:00 June 6th, 2017|Cerno Capital Posts|

While investment manager returns can be observed on an ex poste basis, the more important question is whether managers with a high probability of success can be observed on an ex ante basis. Our response is that they can. There are key characteristics that we see repeatedly across excellent investors. The first characteristic is one that surprises many casual observers of the investment problem. When investing in companies or buildings or lending money “active” should not imply activity. The ability to trade successfully and the ability to invest rarely reside in the same person or team. Excellent investors are patient, methodical people who think about the development of a business in terms of years rather than the development of a share price over minutes. Contrast this with the quick minded trader, taking advantage of market psychology on the demand and supply of paper assets. While the popular image of an investment floor involves Bloomberg terminals, flashing lights, phones tucked into bent necks and much shouting, the Cerno investment team sits in an environment not dissimilar to a library. Some of the great investment teams we speak to boast of the absence of Bloomberg terminals on their investment floors. The result [...]

Keeping an eye on the left field

By | 2017-10-17T10:33:45+00:00 May 8th, 2017|Cerno Capital Posts|

We spend a lot of time thinking about how defendable the competitive advantage is of the companies we invest in. For us this means understanding the breadth and sustainability of the protective moat around the business which underpins profitability and growth. A broad moat tends to be multifaceted incorporating persistent innovation, deep customer relationships and technological expertise. We view this as a key signpost for a company with the ability to deliver long term value. However, focusing exclusively on the playing fields where a company already competes can leave investors (and CEOs) blinkered to events ‘out of left field’. Disruptive technology can shift the goal posts, and even the field of play. Further, the ‘winner takes all’ nature of new technology means the viability of incumbent business models can potentially be challenged. Given the size of the downside risk we try to incorporate a regular re-assessment of innovative threats to our invested businesses. This is often easier said than done, however. Technologies which ultimately become disruptive tend to manifest in unpredictable ways and can work against the grain of the prevailing cultural inertia. Technology which is ubiquitous today often languished beneath the collective conscious radar until a critical mass was [...]