TM Cerno Global Leaders2018-12-13T11:15:48+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.

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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 current economic and stock market cycles are unusually long in duration and this leads to obvious questions about what will be the cause of its ending.

There are several oft mentioned candidates: protectionism, a fall in historically high margins, a strong dollar and interest rates or some combination of these factors.

Students of stock market valuation over time are liable to point to how highly valued equities are and this is hard to dispute.

To our minds, the biggest threats to the US stock market lies within the international (non-US) outlook combined with shifts in demand for equities and their valuation.

The valuation observation is notoriously difficult to narrow down in a causal sense and apply to time frames. Current high valuations are a pointer to sub-normal returns over the medium term but not the short term. Specifically, they tell us something, in a probabilistic sense, about how returns will pan out over a seven-year time frame, not a one-year time frame. (This is what our own testing has shown).

Considerations of the net-demand for equities is thinly trampled terrain for the equity market analyst. It is common place in bond circles to speak of such things – they are more readily predictable, especially in the government sphere. For countries have to re-finance their existing stock of debt (the majority of which has known maturities) as well as its budget deficits, items that are forecast with great care.

Seldom is the subject of demand for equities spoken of with any degree of assurance. However good clues lie when the sources of demand are characterised.

Who is the largest buyer of US equities today? The listed companies themselves. Goldman Sachs estimated in 2017 that aggregate share buy backs in the US would reach US$590bn this year. More recent data from Trim Tabs shows that US$436bn was bought back in the second quarter of 2018 alone, suggesting that the full year total could crest US$1tn. The second biggest purchaser of equities are ETFs at an estimated US$400bn for 2018. Foreign investor activity net of sales of US active equity funds are expected to sum to a meagre US$25bn.

What can be seen at a glance is that the largest segment of demand lies in the hands of company buy-back schemes and ETFs.

Our view of these groups is that they are essentially blind in the sense of undiscriminating. ETF buying is a consequence of inflows, which itself is a function of a) the general switch from active to passive and b) the market continuing to rise. The second factor at least partially drives the first. Active fund managers are trained to take punishment from their clients in the event of poor performance. Investing in ETFs allows less room for blame apportion – a financial intermediary may be on hand for an ear bashing but no comfort can be had from a inky-dink web site or self-directed investment.

Share buy-backs have been a feature in a larger study we are doing on US corporate indebtedness and this study is yielding notable conclusions.

The phenomenon of buy-backs is not by any means new – it is, though, reaching its apotheosis. The underlying rationale and practices have morphed overtime. The “classical model”, if we can call it this, for buy-backs suggests that company boards face decisions as to whether to expand via investment, buy assets or competitors and – if no such profitable avenues exist – consider buying back their shares if those shares are undervalued or at least not overvalued. For all we know, this example of decision tree modelling is still at work in some boardrooms.

The “modern model” is more pragmatic and is driven by the tax efficiency of returning capital to shareholders via buy-backs as against the “tax inefficient” method of paying dividends that would be subject to income taxes. By reducing the share count, earnings per share rises and continuing shareholders own proportionately more of a company (as long as uncancelled bought back shares are ignored). Not surprisingly, CEOs with pockets stuffed with share options, are keen on this too.

Warren Buffet was, until recently, intriguingly ambivalent on the subject. He is on record for being in favour of buy-backs in Berkshire Hathaway held companies but restricted Berkshire in buying back its own shares. He loosened his belt on the subject just two months ago by permitting buybacks in Berkshire when the board “believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.” Prior to this, his board was restricted to buying back shares only when the stock price were no more than 20% premium to book value.

In one fell swoop, Buffet has migrated from the classical model to the modern. With cash of US$64bn in the holding company and debt to equity of just 26%, he may have a lot of buying to do. The average debt to equity of the non-financial universe within the S&P500 is 130%. With a market cap of US$523bn and a book value of US$358bn, Berkshire’s first repurchase will signal his and Munger’s thoughts about where intrinsic value may lie. Berkshire’s share price will doubtless rise on the news.

If you cast your eyes over the balance sheets and cash flow statements of a representative number of large US listed companies it becomes patently clear that the buy-back trend has become a reflexive action of US CFOs – not just deploying all surplus cash but adding leverage to do so. Triple B bonds entail a financing cost of 4% and the average S&P constituent has a Return on Equity (RoE) of 12% so the very action of buying back adds value up until the leverage becomes dangerous.

Even before that point comes, any deterioration in US cash flows will halt the tide )as corporate cash flows are fairly fully committed) and we have the prospect of a buyers’ strike were ETFs to go into net redemption mode, as they would be likely to do.

Which brings us back to the cause of that deterioration.

The problem with the winner-takes-all approach to trade that has roosted in White House policy is that the blow-back effects are considerable and not well understood by the incumbent of the White House. 46% of sales of the S&P500 are non-US and interruption of trade flows via tit-for-tat tariffs weakens the global growth picture.

To our minds, it is waning global demand which presents the greatest threat, exacerbated by a strong dollar, weakening of the Chinese economy and trade friction. These are hardly imaginary events. The US stock-market is a loop and when that loop gets broken we should expect a nasty bear market.

Within the multi-asset portfolios in our charge, we have responded to these risks by moderating equity allocations (cycle peak of 72% and now at 50%), adding generic put option protection on broad equity indices and US Treasuries and maintaining balance sheet emphasis within held companies. Debt-equity ratios within Global Leaders constituents are a more moderate 58% on average.

By |September 10th, 2018|

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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
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020 7036 4123

FAQs on the Cerno Global Leaders Fund

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 offerings, inevitably small that provide a service but in a highly personal way. Our favourite example of this was the now defunct Omotesando Koffee in Tokyo. Eiicho Kunitomo ran a coffee show like no other. He allowed only one customer in at a time and that customer was asked only one question. “Sugar or not?”

The Japanese have a saying for this type of offering: Ichigo Ichie (once in a lifetime). The very point of this service is the restricted scale and hobbyists of all stripes will testify to the special experience of having a custom-made bike frame made or a cricket bat or a pair of shoes.

Kunitomo-san’s offering was ephemeral. The contact between the maker and the customer, the drinking of the coffee. Even his business, which he set up as a pop-up in 2011 and remarkably traded for 5 years.*

Ometesando Koffee, Tokyo

Staying on coffee for a moment, for it is a business of great relevance to Nestle. Nestle’s range spans the drink in instant form (Nescafé, which is brewed and consumed 5,500 times a second worldwide) through to the ineffably upper-end Blue Bottle which began in San Francisco and has over 50 cafés in America and Japan today.

Blue Bottle’s first store in Oakland, California. Source: Blue Bottle

Givaudan is the largest player in the flavour & fragrance industry serving global and regional FMCG producers, including Nestle. Remarkably, given the industry’s scale, there is no standardisation; every product is customised to the demands of the brief provided by the client at a particular time. Thus, Givaudan’s product offering morphs in response to the shifting tides of demand transmitted through the consumer companies.

As social media has enabled stronger feedback loops from consumers, product life cycles have drastically shortened as Fast Moving Consumer Goods (FMCG) companies have struggled to keep pace with changing tastes. Upstart indie brands, also Givaudan customers, have exploited this vacuum to take share.

Far from slowing down, this cycle keeps finding new gears as new trends emerge leaving the detritus of past fads in their wake. This process of iterative customisation means the entire top line of a Flavours & Fragrances (F&F) company can refresh in 4-5 years.

Custom-made, non-standardised products based on ever shorter product cycles means that the threat of imitation is low in F&F. The value delivered by the leading companies is as much in their ability to interpret a given brief, in sympathy with knowledge of demand trends, as it is the molecules that confer taste or smell.

As we study the activities of the companies we own within the strategy it is true of many, if not all, that their appeal to their customers and enduring relevance is their ability to supply to order. In this way, these companies have fused standard with bespoke to operate in a distinct way for each customer.

Luxury conglomerate LVMH has a particular challenge: how to sell increasing quantities of very well-made products across the world. How to stimulate the individual subsidiary brands and their designers but retain financial discipline at the centre. How to be French but not too French.

The fashionable thought is that it is the experience and not the stuff that matters. How can that be bridged if the experience is not what you charge for?

Furthermore, gospels on de-cluttering appears to be pointing to a new religion. This also has Tokyo as its spiritual home. A city where the need is great: the gentleman in the below image needs some help.

Source: Kyoichi Tsuzuki

The movement has its high priestesses such as Marie Kondo. The New York Times ran a piece entitled “Marie Kondo and the Ruthless War on Stuff” and the WSJ chimed in with the more aggressive “Should You Kondo Your Kids?”: a media barrage which found its crescendo in the Huffington Post’s “The Psychological Benefits of ‘Kondoing’”.

Despite the tireless eves-dropping on millennials – both acquisitive and not – there is no evidence that checked-shirted and hobnailed-booted parsimony is going anywhere, in aggregate.

Our view that this is all a myth. The need to badge our selves via objects lies deep within us, Buddhism and Kondoism offer valuable critiques but books on these eventually become clutter too.

Mike Martin, in his book Why We Fight, posits that the most basic human drive is to seek a sense of belonging and this is hormonally driven since early humans. Once you have identified how you belong, this is recognised via tokens. In the age of money, luxury has status because it demarks what somebody can buy that all others cannot.

LVMH is attuned to this phenomenon. Being a luxury goods conglomerate, it faces the task of retaining a necessary cachet in the items it sells whilst achieving and maintaining scale in its subsidiary businesses. The magic mark for such businesses is €1bn in annual sales. Last year its wine and spirits businesses sold €5.1bn in aggregate, fashion and leather €15.5bn, perfumes and cosmetics €5.6bn, watches and jewellery €3.8bn.

In the world of prescription eyeglasses, a degree of bespoke is elemental to serve the wide needs of different levels and combinations of eye correction.

Whilst eye testing remains a traditional activity, it has been conducted in shops rather than eye specialists for some time. Specialists have also converted their premises to more resemble shops.

Synchronous with this is the extension of large, specialist retail chains into online retail portals. However, despite the size of the global eyewear and sunglasses market, valued at US$167bn expected sales this year, online represents less than 10% of this total, suggesting that for Luxottica and others, the customer experience of trying on frames in a shop where they may also obtain advice and eye testing services will remain the paramount method of connecting with customers for some time. Luxottica are dismissive of the applicability of 3D printing in this market as frame making is a multi-step process entailing a complex interaction of materials, specialist machines and human supervisors and crafters.

Bespoke-made goods in the age of mass production often comes attached with an elevated price tag, be it a high-end Swiss watch or components inside a jet engine. However, this is set to change with a maturing 3D printing industry, as lower unit costs are unlocking a new spectrum of possibilities that were previously commercially unfeasible due to complexity. By removing the constraints from traditional manufacturing such as milling, casting or fabrication, designers can create high precision, high performance products, whilst driving cost, time and resource efficiencies.

The technology has been around for many years, although it was primarily confined to low volume specialist applications and prototyping. Renishaw, a UK based engineering company specializing in metal 3D printing, is seeking to encourage higher adoption to once again bring customisation to the masses. A third of all metal 3D printing systems on the market were sold in the last 12 months, according to them. Their RenAM machines replace moulds and casts with lasers and metal powders to construct geometric structures layer by layer in a process known as ‘laser powder bed fusion’, for an array of industries including healthcare, industrial and consumer.

3D Printed Cranium, Mandible and Femur. Source: Renishaw

The industry where perhaps the most impact can be realised is in healthcare, given the subtle variances between human anatomies that demands customisation. Doctors and surgeons can now print directly from 3D scanners, with absolute accuracy, everything from orthopedic parts (e.g. knee caps and hip disks), dental implants, to cranial plates (see above image) and bone structures used in reconstructive surgical procedures that tailor-fit each patient. Newer break-throughs in the field even allow for the printing of organs and other delicate biological parts including the human retina.

A Prosthetic Hip Cup Replacement. Source: Renishaw

Unusually, and perhaps surprisingly given the staid reputation of the industry, hearing aid companies were early entrants into the arena of mass customisation. Since the turn of the millennium it has become increasingly likely that if you wear a hearing aid it has been 3D printed. Indeed, Sonova were the pioneers of adoption collaborating with Belgium-based Materialise in 2000 to develop Rapid Shell Modelling (RSM) for their flagship Phonak brand. Now all the shells for in-ear and ear canal hearing aids, as well as other ancillary components, are 3D printed.

For the user the product experience is vastly improved. 3D printed shells fit precisely and can be tailored to the individuals level of hearing loss. The traditional, manual method of moulding and trimming tended to result in a uniform outcome which fitted everyone broadly and no-one well.

A 3D printed Hearing Aid. Source: Renishaw

For the company there are gains as well. While upfront capex can be US$20,000-150,000 per machine the payback is felt through improved product consistency, the re-use of digital moulds and a supply chain which is digitised and localised.
In the consumer space, objects with intricate geometries such as a mechanical watch that used to require the skilled hands of a Swiss watchmaker, or an Italian artisan for high-end bicycle frame catering to the rider’s contour can now all be built inside a 3D printer, at a fraction of the time.

The Industrial sector is another area that is seeing advanced applications of 3D printing. Machines are capable of printing components with complex topologies demanding the most stringent level of precision for optimised performance: engine turbine blades, fuel systems and guide vanes for aerospace, or components inside industrial machinery, such as Renishaw’s RenAM printers, which they print using their own machines. It was once said that a respectable artisan is one who knows how to craft his own tools, this certainly rings true of Renishaw.

While business schools may discuss stylised factories with raw material inputs placed onto a production line and finished goods driven out of back door, every factory is in fact unique. The vintage of the plant, type of good being produced and any variations thereof, the environment in which the plant sits and its proximity to suppliers and customers are all variables that determine the attributes of a production line. Factory owners are particularly interested in the consistency of the output and the operational efficiency of the line. Therefore, any supplier of service to factory owners must be able to tailor their solutions to the unique characteristics of the factory.

Rockwell Automation delivers factory automation services to its customers. Rockwell can install sensors and monitors that allow for the real-time monitoring of factory performance, as well as specifying equipment that will integrate with existing installations. A factory which has received the Rockwell treatment will allow operators to constantly monitor the production line and identify problems as they occur allowing maintenance to be undertaken on the fly which minimises down-time. The data collected from each sensor can be analysed to optimise production line characteristics.

For Rockwell, each client project is a customised solution which effectively embeds Rockwell’s technology, including their own brand Allen Bradley equipment, into their customers infrastructure. As customers develop new product lines, they return to Rockwell to adjust their production facilities accordingly. For example, Arnott’s, the Australian biscuit manufacturer famous for its Tim Tam brand has worked with Rockwell for 20 years. Arnott’s engaged Rockwell to improve the flexibility and operational efficiency of its Adelaide factory which produces 10,000 tonnes of biscuits annually. International growth had resulted in Arnott’s requirement to customise biscuit recipes to different countries Rockwell was able to simplify the order loading protocols which improved consistency whilst also introducing software which allowed different recipes to be stored, selected and produced on the same production line. The net result of the project was a production line with greater flexibility in in output and reduced margin for human error. In addition, Rockwell staged the implementation of the upgrades to ensure downtime was minimised.

Observations & Conclusions
The emboldened company names in this article are constituent members of the Global Leaders strategy, selected for their strong market positions, long term relevance and ability to adapt and compete in the world of global business.
Looked through the eyeglass of customisation as a phenomenon, we can clearly see that many of the companies we invest in have distinct and complex ways in serving their customers. The complexity arises from the wide array of materials, advancing technological processes and the needs of their customers.

We would argue that success in customisation – whether mass or more bespoke – breeds success. The learning process which drives technological advances is applied across the customer base in an organic manner.

Examples, such as described, provide strong corroboratory evidence for how invested companies achieve and retain leadership.

– James Spence, Fay Ren, Fergus Shaw & Michael Flitton

*You can’t keep a good man down as Kunitomo now operates Koffee Mameya in Shibuya.

Fund Facts

Fund Size £64.5mn
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

Fund & Risk Rating

ARC 2015 3D Awarded


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