TM Cerno Global Leaders2019-01-21T10:47:27+00:00

TM Cerno Global Leaders

TM Cerno Global Leaders Fund Information

The best prospect for outperforming the World Equity Index is to invest long term, in a concentrated, high conviction and low fee portfolio and transact only when necessary.

TM Cerno Global Leaders invests in global companies with sustainable competitive advantages delivering above average returns. Its target is to deliver performance in excess of MSCI World Total Return (GBP) on a 3 year rolling basis.

The fund will  hold 25-30 securities, equally weighted, selected according to a distinct investment thesis that accents industry structure, the sustenance of return on capital and secular growth.

For more information on TM Cerno Global Leaders please contact Tom Milnes.

Funds page ink drawing

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Please ensure you read the Key Investor Information Document (KIID) for the fund selected before making an investment decision. The documents contain important information including risk factors and details of charges.

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TM Cerno Global Leaders Fund Manager

James Spence
James SpenceLead Fund Manager
James is a co-founder of Cerno Capital and lead manages a number of the firm’s collective and private portfolios. After qualifying as a chartered accountant in London (Coopers & Lybrand, 1989) he relocated to Asia. Between 1991 and 2004 he worked as an equity analyst, head of research, and latterly as an equity strategist at WI Carr, Paribas, HSBC and UBS, based variously in Hong Kong, Singapore and Jakarta. James graduated from the University of St Andrews, Scotland with an MA in Philosophy & Logic in 1986. James is a Member of the Chartered Institute for Securities & Investment.

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Latest Investment Letter by James Spence

The MSCI EAFE Index is an index of performance of world shares, ex US. EAFE stands for Europe, Australasia, Far East. This index is often used as a benchmark for US pension fund allocators whose traditional view of the world is divided by US allocations and International allocations. EAFE Equity mandates are granted to invest in shares anywhere in the world, excluding the US. Performance is measured against the MSCI EAFE Index. US$2.2tn is managed this way.

The reason for displaying this is to understand the trend in global equity markets, outside the US.

The Index, captioned below by the blue line, achieved a recent peak on the 25th of January 2018 and has fallen 16.7% from that peak until the time of writing. The wider All Country ex US (the green line which includes Emerging Markets) peaked on the same day and has fallen 16.3% since then. This data includes the January rally.

In simple terms, the world, ex US, has marginally escaped the bear market territory (defined as a 20% fall in an index) which it entered on 17th December.

The bigger picture is that the world is slowing, although not abruptly and not currently in the US. The EAFE and World ex-US Indices have anticipated this slowing, as stock markets tend to do. More recently, we have seen headlines that confirm this: Germany barely growing, Italy in a technical recession, some measure of output in China looking decidedly recessionary (even if the vaulted official GDP figures remain just that: vaulted).

One of the big questions is how long the US administration can ride two horses, without falling between them. That is, enjoy growth at home while caustically rearranging its international relations.

The economic thinking at work in the White House roughly falls into two dominant modes: the Manhattan Real Estate Developer reflex where a plot in my hands is in nobody else’s hands. This can be parsed as a Winner Takes All approach. The second mode has a deeper seam of support behind it and centres its attention on relations with China and within that relationship, technological prowess and intellectual capital. Arraigned around the President are a group of seasoned trade hawks, none of them gutless ingenues.

The Chinese government is in a tight spot. Even without a frontal thrust from the US, there is a difficult balancing act to support growth at home whilst capping unprofitable lending, keeping the lid on capital flight and protecting the value of the currency. Some of the related decisions have inconsistent consequences attached to them and the technocratic prowess of Beijing seems to be diminishing in the shift toward a nationalist autocracy. For example, Vice President Wang Qishan’s recent comments on the pitch of Chinese economic growth lack credibility.

US Trade Representative Robert Lighthizer, a seasoned 71 year old, whose government career representing US trade began in the Reagan administration in 1983, presumably knows this. He is unlikely to be placated by a heap of soya beans in trade redress, however large that heap. China needs to secure some form of transactional deal, one that will please Trump but something that will fall short of evisceration of its next stage of technological development.

A member of Cerno Capital’s Investment Committee, Miles Geldard, put it well when he said the last Cold War was a front between two powers, one of which was economically irrelevant (Russia) whilst this one is between the two pre-eminent economic entities and is therefore of much greater consequence for the world.

The cynical hope is that Trump, in the interests of time (with Special Counsel Robert Muller on his back and the 2020 election around the corner), undercuts his own team’s search for a greater prize by drawing a line on these negotiations with a Tweetable win and a domestically assembled Coca-Cola with Xi Jinping.

Were that to happen, we will enjoy the rally, particularly in Chinese shares, nonetheless underlying challenges remain in place.

At the other end of the spectrum of world investment, we exchange our macro telescope for micro pincers and consider for a moment what is happening in corporate credit. Several observations point to reasons to be cautious on this asset class. High Yield Debt, for instance. This universe faces a troublesome set of pay-offs. For either the Fed increases rates again and spreads widen creating capital losses, or the economy slows and underlying credit quality falls.

There is also an unpleasant fact about so called Investment Grade. Within its ranks is swelling mass called BBB, after its rating, which is the lowest rated form of Investment Grade. The BBB register has swollen from US$1tn in 2010 to US$2.4tn today. Credit rating agencies adopt a relative approach to credit assessment, variable metrics that slacken as supply and demand increases resulting in the moral and analytical void exposed in the book and film The Big Short. Today’s BBB credit may not be the equivalent of years previous. Standards have crept downward. Like any set of arrangements when standards are on a slow creep, the moment of discovery can often be large, sudden and painful.

Amongst the author’s acquaintance are a number of technicians in the field of mergers and acquisitions. They point to extraordinary exuberance in the valuations being paid for companies by private equity practitioners, a community for whom debt is the life-blood. It has been the jammiest of all environments for this industry but just a few points down on company valuations and a few points on the cost of finance and the gig begins to judder.

In some cases, when we analyse listed companies, we need to understand the motivations of activist investors when they become involved in companies. Whilst we do this on a case by case basis, the mix is often the same: petitions to sell assets, leverage balance sheets and buy-back shares. This is a form of high-caffeine, high speed capitalism: an attempt to migrate 10 year returns into 1 to 3 year returns.

When we invest in companies, we look carefully at the cash flows and balance sheets and invest in companies with high cash conversion rates (where cashflows correlate strongly with sales in discrete periods) and good balance sheets. The average gearing of companies within the Global Leaders strategy, for instance, is 24% against an S&P500 average of 63%.

To conclude, the strange way in which US policy victories are sought and commuted might offer some good news in the next month, but it will not, of itself, reset the world on a higher growth path. At the same time, care needs to be taken with investment selection as we can no longer rely on the abundant liquidity that has been the marker of the last 10 years.

By |February 6th, 2019|

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TM Cerno Global Leaders Key Contacts

Tom Milnes
Tom Milnes

Business Development Director
[email protected]
020 7036 4126

Olivia Martin
Olivia Martin

Client Relations and Business Development
[email protected]
020 7036 4123

FAQs on the Cerno Global Leaders Fund

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 sword of Damocles over the thin slivers of equity that supports it.

The idea of a sustainable business is also interwoven into our investment process; how does the company treat its stakeholders, is adequate capital being invested to support the economic moat, how aligned are management, are cash returns in excess of the cost of capital, is leverage employed conservatively, to name a few. Used prudently, leverage can support growth and optimise the cost of capital for a given business. Used imprudently, it results in a front-loading of returns and increasing vulnerability to future shocks. A decade of easy money, unspectacular economic prospects and rising corporate margins have nudged many CFOs, particularly in the US, down the path of least resistance, that of financial engineering.

The results are stark: US corporate leverage has doubled when compared to 2007. Excluding banks, net debt to EBITDA ratios now stand at 1.8x, just below the 2x above which issuers tend to be viewed as sub-investment grade. The median leverage of the 27 Global Leaders is just 0.6x.

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

A good proxy to mitigate downside risk is the avoidance of fragility. As the essayist and fund manager Nassim Taleb* proffered, “it is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it. Fragility can be measured; risk is not measurable”.

Who can say how fast rates will have to rise to temper the heat of the US economy? It may be that overleveraged corporates will find the space to gradually paydown debt before any recession. This is possible but by no means probable. Indeed, as the cost of capital rises, corporate indebtedness is likely to be source of increasing angst for investors, in our view. As Mr Buffet famously quipped in 2008, “you only learn who has been swimming naked when the tide goes out”.

*Antifragile: Things that Gain from Disorder (2012)

Fund Facts

Fund Size £56.5mn
Fund Launch Date 01/11/17
Legal Structure UK OEIC (UCITS)
Dealing Frequency Daily
Suitable for SIPPs/ISAs/JISAs Yes

Available Share Classes

Name Class A Class B
Cerno Capital AMC 0.65% 0.55%
Investment Minimums £5,000 £10mn

Risk Data

Net Equity Exposure*
Gross Equity Exposure*
Short Equity Exposure*
Long Equity Exposure*
Best Month*
Worst Month*
Sharpe Ratio
Calmar Ratio
Upside Capture*
Downside Capture*
Maximum Drawdown*
Annualised Volatility*
Beta (vs World Equity Index)*

Fund Codes

ISIN SEDOL Bloomberg
A Acc GB00BF00QK62 BF00QK6 TMCGLAA LN
A Inc GB00BF00QJ57 BF00QJ5 TMCGLAI LN
B Acc GB00BF00QM86 BF00QM8 TMCGLBA LN
B Inc GB00BF00QL79 BF00QL7 TMCGLBI LN

Fund & Risk Rating

ARC 2015 3D Awarded

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CERNO CAPITAL’s website contains certain information about its approach to providing investment management services but does not provide specific investment advice and is presented for informational purposes only. It does not represent that the services described on the site are suitable for any specific investor. You are advised not to rely on any information contained in this site in the process of making a fully informed investment decision. Instead, you are urged to base investment decisions upon a thorough investigation and to obtain all necessary professional advice.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication or use would be contrary to local law or regulation or in which CERNO CAPITAL does not hold any necessary registration or license. Individuals or legal entities in respect of whom such prohibitions apply, whether on grounds of their nationality, their place of residence or on other grounds, must not access or use this website.

 

DISCLAIMER

CERNO CAPITAL’s website contains certain information about its approach to providing investment management services but does not provide specific investment advice and is presented for informational purposes only. It does not represent that the services described on the site are suitable for any specific investor. You are advised not to rely on any information contained in this site in the process of making a fully informed investment decision. Instead, you are urged to base investment decisions upon a thorough investigation and to obtain all necessary professional advice.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication or use would be contrary to local law or regulation or in which CERNO CAPITAL does not hold any necessary registration or license. Individuals or legal entities in respect of whom such prohibitions apply, whether on grounds of their nationality, their place of residence or on other grounds, must not access or use this website.

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This Legal Notice is governed by English Law and the English courts shall have exclusive jurisdiction over any matter arising out of this Legal Notice or from your accessing of the website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

The information contained herein does not constitute an offer to sell or the solicitation of any offer to buy or sell securities and or any derivatives and may not be reproduced, further distributed or published by any recipient without prior permission from CERNO CAPITAL.

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CERNO CAPITAL is a registered limited liability partnership in England and Wales (Incorporation Number OC326579), registered office: 34 Sackville Street, London, W1S 3ED.

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