Manager Selection

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 [...]

Active Management: Identifying Outperformance

By |2015-07-08T09:32:04+00:00July 8th, 2015|Asset Allocation, Cerno Capital Posts, Manager Selection, Other Posts|

At Cerno Capital, we believe in a) the ability of some managers to outperform and b) our ability to identify them. The track record of outperformance of our approved list is contained in the below chart. Against this, we entirely concede the point being made repetitively by academics and journalists alike that the average active manager does not outperform an appropriate index by a significant margin. It is, though, an error to conjure this observation into a theory that markets are “efficient” and therefore an indexed approach is appropriate. That the “average manager” does not produce returns which are statistically different from the appropriate index is hardly a surprise. This average manager is typically highly constrained in terms of the level of benchmark relative risk taken (no bad thing given an average level of ability) and must incur the costs of implementation not applied to benchmark indices. Faced with the choice of allocating capital to the average manager or a passive index tracker, the choice of the latter is understandable, albeit a significant compromise. Study of the evidence of manager returns reveals that there are a small number of active managers in some market segments who are able to generate [...]

What's So Special About Active Share?

By |2015-02-13T14:32:50+00:00February 13th, 2015|Cerno Capital Posts, Manager Selection, Other Posts|

In short, not much. Like any attempt to reduce a complex process to a digit, it fails as an investment assessment tool. “Active Share” is the number you get when you sum the difference between the weight of a stock in a portfolio and the weight of that stock in an appropriate benchmark for all stocks in the benchmark. The maximum score on this basis is 200%. We can simply divide by two or agree to only sum the overweight positions to arrive at a figure where the maximum score is 100%. The score is an attempt to measure the risk that fund is taking – but note that we are talking about relative risk versus an index rather than absolute risk (the probability of a permanent loss of capital). By using current holdings, the score is not a rear view mirror measure of relative risk in the way that tracking error (the standard deviation of relative returns) is. It is not a new concept. This analyst well remembers being admonished by his CIO for calculating such a “one dimensional and potentially misleading metric” in 2003. The measure was given academic credentials in 2006 by Martijn Cremers and Antti Petajisto [...]