Strategy

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 [...]

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 [...]

The Next Global Downturn: Corporate Debt & the Concept of Fragility

By |2018-07-24T10:14:59+00:00July 16th, 2018|Cerno Capital Posts, Cerno Global Leaders, Developed Equities, General Investment, Global Leaders, Other Posts, Strategy|

Our aim, within the context of the Global Leaders Fund, is to own great companies over multiple market cycles. In this way we operate over a timeframe where competition is scarcer, allowing us the best opportunity to outperform global markets. This overarching objective is underpinned by three concepts: growth, long term relevance (sustainability of returns) and financial soundness. All three are crucial in delineating the leading businesses we want to own. Companies that we can employ in a concentrated, low turnover portfolio and sleep comfortably at night. Growth is perhaps the easier to define: does the company have the tools at its disposal to compound earnings at an attractive rate over time. Relevance and sustainability has sharply diverging meanings depending on who one asks. Our preference is to cast the net as broadly as possible: simply, a company whose current earnings to do not borrow from its future earnings. This concept is wide ranging and influences the fund exclusions. Tobacco for example, where new customers must be found to offset the natural elimination of the existing base by the product itself. Old energy with the extensive disruption from renewables already in full swing. Banks, where inherent leverage hangs like a [...]

The Custom Option

By |2018-07-11T08:54:19+00:00July 9th, 2018|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Investment Quarterly, Other Posts, Strategy|

Conducting big business in the decades following the industrial revolution normally entailed the marshalling of labour and resources in a profitable sinecure. Fur trappers and tin miners, agriculture and energy, railroads and steel all fit this model. These industries persist today but are becoming scarce in the pantheon of very top companies measured by market capitalisation or economic value addition. Labour has mobilised, a thicket of laws exists to prevent excessive exploitation and monopolies of international scale are prohibited. Only perhaps in the world of software and social media have we seen the kind of recently accrued market share power that breeds exploitative practices: Microsoft’s dominance of operating system software is a matter of historic fact and Facebook’s control of the network effect across its platforms are prime examples of predatory corporate behaviour: rabid until checked. Outside these large and unusual cases, successful companies conducting business across multiple continents need to balance of standardisation against customisation. Standard so often entails stand-still which is a death curse for companies. At the other end of the spectrum, few businesses can adopt a fully bespoke offering and hope to grow beyond their artisanal roots. There is another category, companies and sometimes just one-person [...]

Going, Going, Gold

By |2018-05-03T15:44:24+00:00May 3rd, 2018|Asset Allocation, Asset Classes, Cerno Capital, Cerno Capital Posts, General Investment, Other Posts, Strategy|

Our view on gold has changed recently and we have sold the positions in full across all portfolios. Gold has a few things going for it. It has had a prescribed value for thousands of years – stemming directly from the fact that it was, for much of the past three millennia, a medium of exchange, a savings product - in effect a currency. In 1971, when the US finally came off the gold standard, the direct link between paper currencies and gold was lost. Forty years is a relatively short time in a period measured in centuries, so institutional and personal memories of the linkage remain strong. However, Gold is an example of a putatively safe asset which is, on investigation, not reliable in all environments. Gold is not necessarily a beneficiary from higher inflation, as is commonly thought. The price of gold demonstrates no stable statistical relationship with the measured rate of inflation. No matter whose CPI series one adopts, the relationship is unstable by virtue of the very large swings in the gold price. The case for believing that gold offers a very long run store of value is not well constructed. In face of these inconvenient [...]

Investment Letter Feb 2018 Cobras in the Basket

By |2018-05-15T09:41:15+00:00February 5th, 2018|Asset Allocation, Cerno Capital, Cerno Capital Posts, General Investment, Investment Letters, Strategy|

Cobras in the Basket: Bonds, their curves, their relationship with equities and market tops In the last two months, we have seen a meaningful rise in bond yields. Key maturities in the US curve have crept up. The 2Y US Treasuries now stand at 2.15%, the 5s (5 years maturity) have moved up to 2.53% and the 10s to 2.73%. This has not been accompanied by any visible change in central bank policy or rhetoric. It is our belief that investors should take heed and begin to adjust their portfolios, if they have not already done so. This is not the first time in the post crisis period (a period that will soon be 10 years long) that bond yields have fluttered. During the so called “taper tantrum” that occurred between February 2013 and January 2014, those same maturities ran up considerably: 5s went from 0.63% to 1.86% and 10s 1.62% to 2.80%. There were other noticeable sell offs after the post 2008 low. The 10s moved from 2.0% points in early 2009 only to crest at 4.0% in 2010. As we can see, in those previous periods, yields then proceeded down, with the curve compressing to new lows. [...]

FAQs on the Cerno Global Leaders Fund

By |2018-04-26T11:31:58+00:00September 20th, 2017|Asset Allocation, Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Global Leaders, Strategy|

Fay Ren compiles a glossary of questions asked in recent investor meetings and the related answers. Would you discuss your idea generation screen? Our permanent source of ideas is a screened universe of companies. We narrow the global universe of publicly listed companies by applying liquidity, size and profitability parameters. We also exclude banks, energy and basic materials companies given the leverage inherent in the former and commodity price sensitivity of the latter two groups. This screen provides a list of approximately 500 companies which are qualitatively reviewed for Global Leader characteristics. This list is not restrictive and analysts are free to generate ideas from multiple sources, however the screen ensures there is always a ready supply of ideas to work on. Do you have positive ESG filters?   We anticipate holding our companies for very long periods of time and therefore look for those businesses which embrace sustainable practices. While we have not set ethical screens, we have found that our positive screening rules out many of the sectors most associated with ethical screening, for example, our growth criteria rule the tobacco companies out of consideration. Do you invest in utility companies? We do not invest in utilities as [...]

Cerno Global Leaders – The Podcast

By |2017-10-17T10:30:22+00:00September 15th, 2017|Cerno Capital, Cerno Capital Posts, Cerno Global Leaders, General Investment, Other Posts, Strategy|

On November 1st, Cerno Capital will launch a concentrated, low turnover, global equity fund, TM Cerno Global Leaders. The strategy has been active in client accounts since 2013 and target 25-30 holdings are identified via proprietary research from our investment team. In the captioned podcast, Lead Manager James Spence explains the underlying thinking and portfolio structure and protocols which we believe make it a unique offering in the global equity sphere. Listen to the podcast here, or using the player below.

Risky thoughts

By |2017-10-17T10:34:14+00:00March 3rd, 2017|Cerno Capital Posts, General Investment, Other Posts, Strategy|

The investment world can be split into many camps, but, in discussions of risk, owners and custodians of capital, their agents, academics, analysts and journeymen pitch their tents firmly in one of two camps. In one field we have those for whom risk means the probability of a permanent loss of capital which would cancel all hope of achieving an investment objective. This group will oft reference the Sage of Omaha, Warren Buffet, who has been robust in his observation that risk is not synonymous with the preferred definition of the other camp – volatility. In business school classrooms, university lecture halls and many of the world’s largest asset managers it has been standard practice to use volatility, or the “spikiness” of a price chart, as a proxy for the risk of a tradeable asset, sector or asset class. The use of volatility stems from the study of the role markets play in setting the price of individual assets in the short term. It is the role of markets to rapidly assimilate information and establish a price. The mechanism by which this is achieved is the assessment of future returns by a myriad of market participants, each of whom will [...]