Sectors & Corporate Performance

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. [...]

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 [...]

Cerno Capital Joins VW Lawsuit

By |2017-01-19T13:13:13+00:00January 19th, 2017|Cerno Capital Posts, General Investment, Other Posts, Press & Media, Sectors & Corporate Performance|

Boutique wealth management firm Cerno Capital is participating in the litigation seeking damages from Volkswagen. James Spence, managing partner at the boutique, said that the following the emissions scandal, Cerno sold out of its position in the automotive company and joined an investors’ group to join in the litigation in Germany. Saying that it is the only litigation that the company has ever been involved in, Spence pointed out that he felt it was important to be in a part of it following the scandal. He said ‘We were investors in VW and when the emissions scandal broke we sold the position entirely and we are participating in the litigation against VW to seek compensation on behalf of investors. That grinds on. But we hope and expect to be successful on behalf of investors’. Last year, it was reported that fund management giant BlackRock had also joined a shareholder lawsuit, demanding €2 billion (£1.7 billion). The car manufacturer was slapped with damages claims totally €8.2 billion by investors in September. There are currently around 1,400 lawsuits against the company at a court in Braunschweig, Germany. Elsewhere, Cerno Capital has appointed Jane Tufnell, who co-founded Ruffer Investments, to its advisory board.She [...]

Health Care Stocks – Accessing the Demographic Dividend

By |2016-02-26T14:19:50+00:00February 26th, 2016|Bottom Up, Cerno Capital Posts, Developed Equities, General Investment, Other Posts, Sectors & Corporate Performance|

In an endemically low growth world, prone to accelerating forces of disruption, it has become progressively harder to identify stocks to hold for the very long run. There is, though, a group of superficially boring healthcare stocks which are locked into long term palliative, chronic or geriatric pathologies where the demand profile is observably robust and their respective market positions pretty much unassailable. We hold six such companies within the Cerno Global Leaders Strategy, an equity investment program designed to identify and invest in companies for the very long term. The six are made up of three medical equipment suppliers, two chronic conditions specialists and one generalist. The healthcare companies we like have very simple, understandable products and services and are accessing large and growing patient pools. These companies typically operate in oligopolies where the competitive environment is relatively benign, where they are able to maintain stable market shares through high barriers to entry, switching costs and superior intellectual property, thereby sustain high margins for an extended period. We avoid complex and intangible businesses with high valuations and no proven cash generative abilities, for instance many new names in the biotech segment. A basic understanding of the key demographics is [...]

The onward march of the asset-light business

By |2014-03-28T16:49:54+00:00March 28th, 2014|Cerno Capital Posts, General Investment, Other Posts, Sectors & Corporate Performance|

Of great interest to us are the internal workings of markets. These are often very good indicators of where we are in the ebb and flow of valuation cycles. Valuations work, provided you are patient. They especially work if the constructed relationship is mean reverting and also non-mainstream. Recently, we have been looking at equity valuation dispersions: that is, the gap between highly valued equities at one end and lowly valued equities at the other. It is unproductive to guess at where the natural relationship lies: it can be plotted and therefore a mean or average level can be observed, but does the average mean anything in this instance? Of greater interest is when the range relationship becomes distorted due to the radical re-pricing of one group, or a thematically linked group of stocks.     A glance at the above chart indicates that, in recent financial times, this happened most dramatically in the TMT bubble which burst in 2000. In 2000 the ratio of the book multiple of the high price to book value stocks ran up to a multiple of 2x that of low price to book value stocks. Bear in mind, this is a measurement of all [...]

Implication of industry structure on corporate profitability

By |2013-09-05T11:39:30+00:00September 5th, 2013|Cerno Capital Posts, Other Posts, Sectors & Corporate Performance|

Industry profitability, as measured by a firm’s return on capital employed (ROCE), is determined by how successfully a firm can capture the value it creates for its buyers, which can differ depending on the structure of the industry.  When the structure is favourable, companies are typically able to retain a decent proportion of the value (e.g. medical supplies). Conversely, in an unfavourable environment, much of this value would be competed away to others (e.g. autos), be it customers (driving down prices), suppliers (inflating costs), substitute products (reducing differentiation) or potential or existing rivals (eroding market share). It is also important to distinguish between cyclical factors that affect short-term profitability, such as the weather or a particular business cycle, from the structural fundamentals that shape long-term profitability. This is manifested through the collective strength of the five key competitive forces (defined by the consultant, Michael E. Porter) that governs price, cost, and investment input required:   Often one or more of the five forces will take prominence in an industry. For example, in an industry with an oligopolistic market structure, natural barriers exist inhibiting new entrants via cost economies of scale. Further, these companies command superior pricing power as consumers have [...]