General Investment

Dividends: Please sir, can I have some more?

By |2020-06-16T15:16:58+00:00June 16th, 2020|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Sectors & Corporate Performance|

The legal relationship between the joint stock company and its shareholders deems that the only thing to which an equity investor is entitled is the dividend that a board of directors sees fit to declare. An equity investor in today’s environment is likely to be experiencing the immediate pain of dividend cuts or cancellations. This requires the equity holder to revisit the investment thesis – a task made more challenging by the lack of comparative periods on which to draw reference. While some businesses are able to continue to operate with modest levels of disruption in the current environment, others have experienced a complete halt in operational activities and attendant revenues. These companies must prioritise near term survival in capital allocation decisions. To be clear, the declaration of a dividend is a capital allocation decision. It matters not that a particular company has a long and aristocratic history of dividend payments. Each year, management must determine whether to retain all profits or whether to take a portion of profits that could be retained and spoon them into the begging bowls of shareholders. Readers of Dickens might compare some shareholders with Oliver Twist. The UK has one of the strongest dividend [...]

Style Performance

By |2020-06-14T08:42:26+00:00June 14th, 2020|Asset Class Returns, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Sectors & Corporate Performance, Strategy|

The rally in equity markets has extended into June, having recovered substantially from the depth of the March sell-off: The global equity index is -6.3% from its peak and the S&P 500  -5.4%, whilst the NASDAQ index has made new all-time highs. Despite the deepest economic downturn since the Great Depression, a dislocation between financial markets and economies has opened up as governments’ blend of monetary and fiscal policy initiatives has underpinned prices. Markets were highly discerning in the initial sell-off, less so since. In the initial phase, they rewarded visibility and stability and punished the opposite. Cross sectional return dispersion in different markets spiked, and volatility of price moves reached the highs recorded in the Global Financial Crisis of 2008 before easing in the second quarter. The concentration of performance in two sectors – Tech & Health Care – gave rise to extreme narrow market breadth, with the median company in the S&P 500 still underperforming the index by 15.7% year to date as at the end of May. Defensive quality companies that offer investors consolation in the form of revenue growth, profit retention, and financial resilience in their balance sheets and cashflows outperformed the market during this period. [...]

In Conversation with Russell Napier – A Cerno Capital Webcast

By |2020-06-21T09:44:22+00:00June 10th, 2020|Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, US|

We summarise below the Q&A section of our recent webcast with Russell Napier. The listener submitted live Q&A that ranged over a wide variety of market and investing topics. We think it is particularly pertinent to consider Russell’s views on the changing landscape for inflation. Previously an ardent deflationist, Russell now thinks an inflation is likely. What period in financial history does the current economic situation remind you of? The best playbook probably comes from 1966-1982. Inflation was over 200% for the period. Equities were highly priced going into the period, and it is a good reminder that “price is what you pay, but value is what you get.” Interest rates went higher, but profit margins did not keep pace. Gold outperformed and did significantly better than gold shares, and surprisingly oil failed to make a real return. Few sectors in the equity market generated a real return. Systems without debt problems didn’t have a need to pursue financial repression to inflate away World War II debts (e.g Switzerland, Hong Kong). Why do you think people in finance do not pay more attention to financial history? To quote Charlie Munger: “Show me the incentive, and I will show you the [...]

Thoughts on a Crisis: Nick Hornby answers some questions

By |2020-05-20T10:21:49+00:00May 20th, 2020|Cerno Capital, Cerno Capital Posts, General Investment, Other Posts|

In this series, members of the Cerno team reflect on the crisis and provide detail on their work and domestic lives. For our next interview, we caught up with Nick Hornby, Managing Partner to hear his thoughts on life during this time, and what the lasting consequences might be for the UK and wider societies. What do you think are the longer-term consequences for the UK as a result of this crisis? As humans, we are more than likely to go back to the way we were doing things before, and as it stands, I do think we will revert to how life was, but some things will clearly change for some time. I do think that we will live in a much more socialist world, in a good way, as we move out of this period. We will become more aware of the value to society that the cleaners, NHS frontline staff, bin people, bus and train drivers have. Indeed, all of those workers providing the crucial infrastructure that we rely upon to make our normal world possible. We are aware that the government is ultimately trying to set parameters for society going forward. There will be a feeling [...]

Thoughts on a Crisis: Fay Ren and Mike Flitton answers some questions

By |2020-04-30T13:56:53+00:00April 30th, 2020|Cerno Capital, Cerno Capital Posts, General Investment, Other Posts|

In this series, members of the Cerno team reflect on the crisis and provide detail on their work and domestic lives. For our next interview, we caught up with Fay Ren and Mike Flitton, Co-Portfolio Managers of TM Cerno Pacific, to hear how they have been coping and adapting to life during this time. FAY REN What do you love about working from home? I'm definitely not missing the morning commute (particularly on the Jubilee line!).  I quite like working from home in some cases as it's quite easy to multi-task. If you are in a Teams meeting with someone, you can just jot down points during the call and start actually working on the things you are discussing, so it ends up actually being an efficient way of working. We've been recently working on the quarterly Investment Reports, which requires a lot of writing and it's nice to not necessarily be distracted as much as you would be in the office. The ease of being able to switch around is also great - you work in the garden, or the kitchen - and be in your comfy clothes! Do you find you are making more changes to the portfolio [...]

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 [...]