TM Cerno Global Leaders2019-07-11T15:01:33+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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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 approaching half year mark is a good time to gauge the health of world financial markets.

2019 has been better than 2018. World equities fell -7.4% in 2018 in local currency terms and have risen +15.9% YTD in 2019. World Bonds (in aggregate, using the JP Morgan composite) fell 1.0% in 2018 but have returned +4.7% so far this year (data to 18th June). It therefore appears that 2018 was a pause for consolidation, permitting the full-bore late cycle rally that has since transpired.

If we have enjoyed rising bond and equity prices in this most recent period, how rare of an event is this?

Looking back over the last 35 years to 1984, we observe that, in 26 of those heady years bonds and equities have risen in tandem. There have been no years in which they both fell, six years in which equities fell and bonds rose, the rarest instance being the three years in which equities have risen and bonds have fallen, the last one of these being 2013. We can see, at a glance, why balanced investment (a non-determinate mixture of bonds and equities) has been such a hoot.

There is considerable and understandable anxiety about what might loom over the horizon. The phrase “late cycle” is suggestive of cyclical conclusion and it is therefore sensible to imagine what broad factors could trace the cycle’s end. Bull markets in shares are propelled by two things: rising aggregate corporate earnings and/or rising valuations. An intuitive perception of this cycle might be that we have enjoyed both – with valuations more consequential than earnings. But is this true?

Earnings per share in the US have risen by 6.1% per annum compound since 2008; this eclipses earnings growth of 5.6% per annum recorded during the halcyon days of expansion between the end of WWII and the market top in 1962. Whatever you might think of modern US capitalism, it has delivered the manna – in the form of earnings growth – that equity markets need to feed upon.

The current price to earnings (PE) multiple of the S&P500 is 18.1x, exactly the same PE as prevailed in June 2009, suggesting that valuation multiples have not expanded at all in this cycle, somewhat counter to the general thought that the equity market has become more expensive.

17 of the 40 equity markets that MSCI provide index data on world-wide have lower PE ratios than prevailed in 2009 (23 higher, by extension) and the median multiple current stands at 14.1x versus 13.0x in 2009.

As we know from past cycles, the fodder of bear markets is more often a fall in earnings which then exposes the valuation top. Valuations are seldom, if ever, the solitary marker. The TMT bust in 2000 is commonly regarded as a valuation top but broad market (S&P500) index earnings fell by 35% between the 3rd quarter of 2000 and the 4th quarter of 2001(-68% if extraordinary accounting items (losses) are augmented into reported earnings).

The question then becomes, what confluence of factors could generate a fall in earnings? If the epicentre of the last cycle end of 2007-2008 was personal finance vis the US housing market where valuations became high as affordability fell and leverage increased, we suggest that the key area of attention in this cycle is corporate leverage.

A distinguishing feature of this cycle has been rising corporate leverage, especially in the US. It is easy to see why. One of the attendant effects of Quantitative Easing has been to depress bond yields, the cost of debt and thereby reduce the corporate cost of capital. This has incentivised CFOs to take on more debt to boost Return on Equity. As more corporate pay packages become driven by Earnings Per Share (EPS) growth, the easiest way to goose growth in these variables is to take on debt. The Private Equity sector, which has been very high on the hog in recent years, provides further impetus to this by their model activity, typically via streamlining and gearing.

134 of the 398 non-financial companies in the S&P500 have net debt to equity or gearing ratios of in excess of 1:1, a rough measure of overextension. This is one third of the universe of the world’s most successful economy and up 13 percentage points the comparable universe 12 years ago.

The modern argot for estimating the burden of corporate debt on a company-by-company basis has shifted to Debt/EBITDA from pure balance sheet measures – which moves judgements from absolute measure of jeopardy to an affordability-based measure. This is an absolute to relative shift which can often lead to problems down the line.

It is also pertinent to note that private debt in the world runs at 4x public debt. It is convenient to point the finger at governments and central banks for the world’s travails but it is personal and corporate choices that are providing the conditions precedent for the next upset.

If Collaterised Debt Obligations written on willingly mislabelled baskets of mortgages were the truly stinky thing in the last cycle, the Dividend Recap could be this cycle’s nefarious worst practice. Divi Recaps typically taken place when a Private Equity firm takes control of a mature business in a mature sector. The new controllers then look to defray the cash flow cost of the buy-out by leveraging the balance sheet to pay themselves a dividend. This creates a floor for their investment. Even if the business ultimately fails, the new-owners’ downside is capped. Corporate Codes do not often result in owners being retroactively punished for imprudent stewardship. This moral and judicial failing is tacitly justified on account of the need to promote risk taking as the necessary lifeblood of the capitalistic system. Warren Buffet and Charlie Munger rail against this type of activity. Despite their fame, they can only truly influence companies under their control.

With these observations in mind, a rise in the cost of debt would be a very unwelcome shudder on the rudder. This does not seem likely and we have probably reached the cycle top in US interest rates. Whilst the Federal Reserve has yet to become demonstrably dovish in its comments, markets now expect two cuts in base rates this year. If the developed world faces a low growth, low inflation low interest rate future then the world is turning Japanese: a reference to conditions that have prevailed in Japan since its last big cycle top of 1989. This is not all bad but points to fluky markets: bonds flat on their backs and going nowhere and equities operating in big ranges but struggling to hitch onto an upward channel.

Another development to contemplate is the coming “techno-rift” between the US standard and the Chinese standard. Whilst the banning of Huawei is the sharp point of Trump’s government agencies’ attacks and he conflates this as more of a trade war than an intellectual property issue, the anti-Chinese approach is a winner in America and links the aisle in terms of Republican and Democrat. There are two likely consequences of this: firstly that market-by-market, companies and agencies will have to choose whether to take US technology as their standard or Chinese. These decisions will be fraught with geopolitical pressures but may ultimately help secure China’s pre-eminence provided it can achieve sufficient competency in a large enough array of areas. This will be a 20 year war and therefore well beyond the twin terms of President Trump and at the far end of Xi Jingping’s possible influence.

The second set of consequences relate more to manufacturing and here we are seeing more relocation decisions, often that have been delayed, to move contracting out of China. On-shoring is on the up and reallocation within Asia is rising. Other countries could have their moment in the sun: Vietnam is a clear beneficiary and both India and Indonesia have chances to prosper from these shifts.

There is a great deal of concern about what is termed “reverse globalisation” or “deglobalisation”. These concerns may be overblown. In the 21st Century, The President of the United States operates by the grace of US companies, like it or not. The shorthand way of understanding this is to look at the level of the S&P500 index. Decisions that negatively impact corporate America tend not to linger on the vine. Policy reversals are more the norm and this is part of the current construct. Re-allocation of manufacturing and supply chains around the globe are just part of pragmatic decision making and not the end of anything.

The big exception to this line of thought must surely be with respect to the planet and the environment where part of the necessary action must be lessening: less CO2, less plastic, less carbon. Less people, frankly. This is a difficult matter in a world that operates on a growth paradigm and one that is dividing the generations.

By |June 19th, 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

As the largest food and beverage company in the world, Nestlé leaves a significant footprint on the markets it touches. While Nestlé is not a primary producer, it maintains close links with agriculture to establish provenance and guard against reputational risk associated with poorly chosen inputs.

While its products are mostly consumed, the packaging used to deliver product is a material consideration – Nestlé is concerned both with the source materials of packaging and its disposal after use. The investment that Nestlé makes in both packaging technology and ingredient sourcing is a competitive advantage that allows it to maintain Global Leader status.

Rather than simply observing the practices used by agriculture, Nestlé is an active participant in the development of new practices that improve productivity, crop quality and environmental practices. Nestlé achieves this via its network of Plant Science R&D centres and directly employed agronomists. Each year, the company processes 10% of the coffee and cocoa produced globally. For an example of a practical initiative we can look to Jardin in the Colombian Andes where Nestlé sources high quality coffee beans for Nespresso capsules. Traditional processing of coffee cherries involves on-farm fermentation to remove the outer shell with the waste product simply washed into rivers causing pollution. Nestlé and its partners worked with the local community to build a processing mill which brought together 200 farmers in a co-operative. The more consistent processing achieved by the mill results in a higher output and Nestlé’s rejection rate fell from 50% of beans offered to zero. This produced a higher income for farmers. Meanwhile, the mill uses water more efficiently causing a 60% decline in the volume of water used to produce coffee beans. Further, by incorporating a wastewater management system, water pollution of local rivers has been cut to zero.

The coffee produced by the Jardin Mill is delivered to consumers in an aluminium Nespresso capsule. The recyclability of aluminium was a key driver of the selection of the material when the capsule was originally designed. Not all packaging is so easily dealt with. The quantity of plastic packaging which is discarded or not recycled is a well-publicised problem. With annual revenue from sales of bottled water running at over 7 billion swiss francs, Nestlé is interested in engaging positively with the challenges presented by plastic packaging.

Nestle has committed to making all packaging reusable, recyclable or compostable by 2025 and plastic presents its greatest challenge in meeting this goal. To achieve this, Nestlé partners with innovative businesses that are at the vanguard of materials science. For example, with support from Nestlé and PepsiCo, Danimer Scientific has developed a bio-polymer called Nodax which is a biodegradable alternative to petrochemical plastic. Nodax has received FDA approval for food use and therefore presents the potential for producing a bio-degradable bottle.

Nestlé generates profit from selling consumables in the food and beverage sector. By investing in improved methods and innovation at its suppliers Nestlé is giving itself the best chance of remaining the leading food and beverage company globally.

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.

This website has been published by CERNO CAPITAL which is authorised and regulated in the UK by the Financial Conduct Authority.

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

Pillar III Disclosures

The Stewardship Code