General Investment

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 [...]

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 [...]

Investment Letter dated 19th June 2019

By |2019-06-19T16:21:40+00:00June 19th, 2019|Cerno Capital, General Investment, Investment Letters|

The approaching half year mark is a good time to gauge the health of world financial markets. 2019 has been better than 2018. World equities fell -7.4% in 2018 in local currency terms and have risen +15.9% YTD in 2019. World Bonds (in aggregate, using the JP Morgan composite) fell 1.0% in 2018 but have returned +4.7% so far this year (data to 18th June). It therefore appears that 2018 was a pause for consolidation, permitting the full-bore late cycle rally that has since transpired. If we have enjoyed rising bond and equity prices in this most recent period, how rare of an event is this? Looking back over the last 35 years to 1984, we observe that, in 26 of those heady years bonds and equities have risen in tandem. There have been no years in which they both fell, six years in which equities fell and bonds rose, the rarest instance being the three years in which equities have risen and bonds have fallen, the last one of these being 2013. We can see, at a glance, why balanced investment (a non-determinate mixture of bonds and equities) has been such a hoot. There is considerable and understandable anxiety [...]

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 [...]