General Investment

Cerno Pacific continues to outperform in weaker markets

By |2020-03-10T12:12:58+00:00March 10th, 2020|Cerno Capital, Cerno Capital Posts, General Investment, Regions|

After six weeks of draconian restrictions on movement in China, new COVID-19 cases have dropped substantially within the country. However, cases outside China are beginning to spike (reaching 105 countries at the time of writing), creating fear inside equity and commodity markets worldwide as supply disruptions create demand vacuum. The de- facto oil price war launched over the weekend subsequently triggered a day of panic selling. The year-to-date performance of the Pacific Fund is -1.8% (prices as at 9th March), which compares to the MSCI AC Asia Pacific Index -11.2% in GBP terms. The portfolio’s relative resilience stems in part from its natural tilt to balance sheet quality, which we have expanded on in a prior note (link below). In addition, as markets extended into 2020, we added to our currency hedge positions in the Japanese yen. Currency positioning added +1.2% from February through to March. The Pacific Fund is a concentrated portfolio investing in innovative companies across the Asia Pacific region. Our focus is on major structural changes and technology upgrades, and we look for companies with quality balance and cash generation in expanding addressable markets. The fund has 15% exposure to Health Care and 24% exposure to online [...]

Global Leaders balance sheet further strengthened

By |2020-03-09T11:09:50+00:00March 9th, 2020|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment|

Last week, we reorganised the Global Leaders portfolio to reduce implicit leverage. Four companies have been sold: FedEx, Oracle, Rockwell and Waters. Capital released from these names has been recycled into all the other portfolio holdings. The net effect of these changes is to improve the financial backing of the portfolio and net debt to equity falls from 25% to 20% as a consequence. The actual improvement is a little better than this as Waters has a negative equity balance due to share buy-backs and therefore does not submit to conventional debt to equity analysis. Whilst we considered this action, we looked also at debt service levels. Although none of the companies we own are in any way constrained on their ability to service debt, we have taken a very conservative measure in light of the widespread effects of the spread of the coronavirus. As the fund is fully invested at all times, the net reallocation further emphasises financial strength in a portfolio that already had good characteristics in this regard. Whilst it is unusual for one factor to dominate a multi-factor investment process, it will happen on occasion and the coronavirus is an exceptional phenomenon. Should the virus scare [...]

Coronavirus and economies – thoughts from Russell Napier

By |2020-03-05T13:15:19+00:00March 5th, 2020|Cerno Capital, Cerno Capital Posts, General Investment|

Banks will be at the forefront of this given that missing interest payments will be the norm not an exception in a pandemic. This will come in several forms: 1) Forbearance. These measures are already in place in China and I are beginning in Europe. Banks would be told not to foreclose of businesses and individuals who did not make interest payments. I also think that such a policy might be quite difficult to reverse as politicians might get a taste for this form of intervention. Given banks’ incomes would decline, they would need a cash flow to replace the missing interest payments and this would likely be in the form of loans from central banks. 2) Fiscal expansion & tax forbearance. Useful but hardly likely to close the gap if everybody is indoors but there are still things that can be done in terms of delaying tax payments. It might not have a lot of impact but it will get key players, such as Germany, over the Rubicon to a world where fiscal expansion is acceptable. It might be enough to get Eurozone countries to back Lagarde’s plan for “helicopter money”. 3) Purchase of corporate debt. Corporate debt is [...]

Accenture added to Global Leaders portfolio

By |2020-02-26T13:22:45+00:00February 26th, 2020|Bottom Up, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Other Posts|

Accenture is the largest and most diversified independent technology consultant and outsourcing provider globally, serving customers in over 40 industries in more than 120 countries. Formally established in 1989 (but operating since the 1950s), Accenture began life as the consulting division of the then accounting giant Arthur Andersen and subsequently broke off from its scandal-ridden parent in 1998. Ever since its founding, Accenture has had a mandate to focus on business and technology consulting related to managing large-scale system integrations, which has differentiated it from peers, who have tended to emphasise management consulting. Under its former CEO Pierre Nanterme and now Julie Sweet, Accenture has followed a strategy of continuously identifying and going after new high-growth verticals, aided by the institutional experience and insights gained from the numerous industries they work in. This approach enabled the company to stay agile and detect emerging technology trends early, understand how it can be integrated into business operations, thereby remaining relevant to their clients in an advisory role. Today, the company derives over 60% of its revenues from ‘new’ businesses, including digital, cloud, connectivity and cyber-security, and actively exploring emerging areas including block-chain, quantum computing and AI. In a fast-changing world, the urgent [...]

Investment Letter dated 29th January 2020 – Camus and all that

By |2020-02-05T12:43:40+00:00January 29th, 2020|Asset Allocation, Cerno Capital, General Investment, Investment Letters, Regions|

The outbreak of Novel Coronavirus (2019-nCoV) in Wuhan revives memories of the 2002-3 SARS virus which broke out of Guangdong province and was responsible for 648 deaths in Hong Kong and China and 127 deaths elsewhere in the world. It should not be forgotten that more deadly epidemics have taken place between these two viral outbreaks, namely H1N1, Ebola and MERS. The writer was a resident of Hong Kong in 2002 and can recollect the palpable fear that beset the territory at that time. Even when its lethal nature was acknowledged (following several months of attempted cover up by the central authorities) protocols at hospitals remained inadequate in the rush to treat patients. Doctors, nurses and orderlies worked in the knowledge they were at great risk of contracting the virus which at that time was a great deal more fatal than the eventual, overall fatality count. We remember them. Before SARS came along, Hong Kong was betwixt the horns of two deflationary events: falling property prices and an equity bear market – in sync with the rest of the world – following the Tech stock boom of the 1990s. Just when things couldn’t seem to get worse, one of Hong [...]

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 [...]

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 [...]