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 [...]
We were delighted to recently support David Bell, PCD Club, and Fraser Dyer, FED London, as they undertook the Maidstone to Monaco Rally in aid of the Parenta Trust, who build schools and provide education for pre-school children in Uganda. Participants in the Rally have built 6 schools in the last 6 years, providing opportunities to some of the world’s poorest families. This year, the Rally group have raised £16,000 for the cause, which will provide education for 150 children. David and Fraser documented their journey over the Alps, which they share with us below: On Wednesday 27 June, 7 cars left Maidstone with a goal of getting to Monaco and back via the Swiss Alps in 5 days. The twist was that cars have to be bought for less than £500 and are decorated, coming in all shapes and sizes. On our trip was an ancient Volvo covered in carpet; a Land Rover with 250,000 on the clock and a Vauxhall Corsa that was about to be scrapped. Our car was a convertible 1997 MG MGF with 153,000 on the clock, easily the best car there! We were kindly sponsored in our mission by Cerno Capital and a couple [...]
We are delighted to announce that Nick Hornby has been named as one of the Top Ten Ultra High Net Worth Wealth Managers 2018 by Spear's. In the accompanying entry, Spear's writes that Cerno Capital has just celebrated ten years as a firm, with Nick looking forward to expanding the firm's offering from a boutique focusing on private clients to taking on business from consultants and financial intermediaries. Nick's entry can be seen below, and the full online entry can be read here.
A short history of Italian government debt Italy’s titanic national debt, similarly to Rome, was not built in a day. In Italy, like much of Europe, the saga begins benignly in the ashes of World War II. The economic miracles experienced by states such as Greece, Germany and Japan in the 1950s-60s as the countries rebuilt their economies from the ground up (with aid from the US Marshall plan) resulted in two decades of breakneck economic growth. In Italy this period was known as ‘il miracolo economico’. GDP growth averaged just below 6% until 1963 and 5% thereafter until 1973. This boom eventually gave way to fiscal largesse in an attempt to continue the dramatic growth rates and associated quality of life improvements the domestic population had grown accustomed to. With the puncturing of ‘il miracolo’ during the 1973 global oil crisis, subsequent Italian governments borrowed their way to increased prosperity. From the Years of Lead in the 1970s to Rampartism in the 80s and the Second Republic of 1992, Italian debt steadily rose from 30% of GDP, along with real living standards. Italy Debt to GDP ratio 1900-2018. Source: Bloomberg By the early 90s where our overview begins, Italian [...]
In his autobiography, “The Way the Wind Blows”, former prime minister Alec Douglas-Home recounted bucolic childhood memories of Scottish summer holidays with each day’s activities determined by the direction of the wind. That wind is increasingly viewed as part of the solution to society’s need for a sustainable source of electricity. Critics of wind power were understandably numerous, when faced with the prospect of the spread of futuristic turbines across wild places. Perhaps, like Home might, they fear for the plight of game birds and the visual pollution that on-shore wind farms bring. Technical and operational hurdles for on-shore wind farms include the unreliability of on-shore wind speeds and wind shadow – the phenomenon of wind strength depletion downstream of a turbine. There is also the question of availability of suitable sites. Like raindrops on sun-bleached rock, these concerns evaporate when wind turbines are placed off-shore. Off-shore wind is more reliable, which means more consistent energy generation and average wind-speeds are higher which permits the use of bigger turbines and therefore greater energy generation capacity. The UK is at the front of the pack of nations building off-shore wind infrastructure. In 2017, the UK generated 15% of its electricity requirement [...]
Newly approved Pacific & Emerging strategy stock: China Literature operates China’s largest online reading platforms, comprising 48% of the total online & mobile reading market with 191mn monthly users. The company hosts a proprietary library of 10.1 million literary works spanning 200 genres, generated by its 6.9 million writers online, for consumption online. Bypassing the traditional publisher model, popular titles are monetised through paid subscriptions and, increasingly, through licensed adaptations into other media formats including film & TV, web series, animations, games, and audio & physical books. Leveraging its scale, treasure trove of intellectual property and distribution capability, the company has entrenched itself at the centre of China’s literary ecosystem, connecting writers, readers and adaptation partners. China’s online literature market is expected to grow at +31% CAGR to 2020, having achieved a +45% p.a. growth between 2013-16. The wider Chinese entertainment market is also seeing robust growth (+14% CAGR to 2020). The domestic Chinese box office is set to overtake the US this year, giving rise to strong demand for high quality content.
Newly approved Global Leaders stock: Chr. Hansen is a leading global bioscience company engaged in the development of natural ingredient solutions for the food, nutritional, pharmaceutical and agricultural industries. The group’s products leverage its core competence in microbial strains, or ‘good bacteria’, enzymes and natural colours. 60% of group sales are derived from microbial cultures (the majority of which are starter cultures for cheese and fermented milk), 20% from human and animal probiotics, and 20% from natural colourings for the food and beverage industry. The group is uniquely positioned at the convergence of multiple consumer trends: the desire for natural ingredients, the removal of antibiotics and chemical preservatives in the food chain, health and wellness and the huge potential of the human microbiome. Over the past 10 years the group has delivered an admirable combination of expanding margins and organic growth of 10% p.a. Concurrently return on capital has expanded from 4% in 2010 to 16% in 2016/17 driven primarily by improved asset turnover.
On Wednesday 24th May, we held our annual Investor Update at our offices on Sackville Street. Clients and friends of the firm joined us for an afternoon of presentations given by the Investment Team, before drinks and an exhibition of photographic works by Naomi Baker and Linnea Rheborg, the two Getty Images interns we have been supporting over the past year. James Spence and Fergus Shaw led the presentations commenting on the world as we see it, updates to our investment strategies and global themes that we will be following in the coming year, before being joined by the full Investment Team for Q&A. In particular, James and Fergus were keen to mention the below points: Uncertainty in investment should not of itself be feared. It is the locus of investment returns. Valuations require attention, but the biggest risks reside in so called “safe” assets such as bonds. Several changes in allocation in the past 12 months: notably the sale of gold and US inflation linked bonds. The addition of a China small cap specialist to portfolios and a new investment in Funding Circle, which channels credit to smaller scale commercial enterprises. Following the investment presentations, Naomi and Linnea joined [...]
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 [...]
The Investment Team compiles questions and answers, asked at our Global Leaders Breakfasts on Wednesday 25th & Thursday 26th April 2018. Most of the information is public, what do you see in your stocks that others don’t? It is less a matter of seeking information advantage in the here and now but structuring our thoughts over sufficient long-time horizons where competition is scarcer. The arbitrage is largely in holding great companies for the long term and avoiding the usual pratfalls which are over-leverage and disruption. Does the hard rebalance contradict the proposition to hold stock in the long-term as you cut the winners? Rebalancing is consistent with our expectation of each company making a meaningful contribution to return and our time horizon given lower confidence in short term share price outcomes versus longer term fundamental performance. We expect rebalancing to equal weights will add value as it is the natural response of a long-term shareholder to the impact of stock market preferences on share prices. Cutting positions to maintain equal weighting is an important risk control given it minimises the portfolio of major industry disruption to any one position. Our approach effectively deals with the situation of holding an outsized [...]