TM Cerno Global Leaders2020-07-28T08:03:12+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.

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 outbreak of Novel Coronavirus (2019-nCoV) in Wuhan revives memories of the 2002-3 SARS virus which broke out of Guangdong province and was responsible for 648 deaths in Hong Kong and China and 127 deaths elsewhere in the world. It should not be forgotten that more deadly epidemics have taken place between these two viral outbreaks, namely H1N1, Ebola and MERS.

The writer was a resident of Hong Kong in 2002 and can recollect the palpable fear that beset the territory at that time. Even when its lethal nature was acknowledged (following several months of attempted cover up by the central authorities) protocols at hospitals remained inadequate in the rush to treat patients. Doctors, nurses and orderlies worked in the knowledge they were at great risk of contracting the virus which at that time was a great deal more fatal than the eventual, overall fatality count. We remember them.

Before SARS came along, Hong Kong was betwixt the horns of two deflationary events: falling property prices and an equity bear market – in sync with the rest of the world – following the Tech stock boom of the 1990s.

Just when things couldn’t seem to get worse, one of Hong Kong’s favourite film and Canto-pop stars, Leslie Cheung, took the lift to the top floor of the Mandarin Oriental, asked the health club attendant there for an orange juice, smoked a cigarette on the balcony and then threw himself off the top of the hotel. Those were dark days.

By mid-2003, asset prices in Hong Kong had been falling for three years. Colleagues undertook statistical work on SARS cases and that pointed to a steady linear progression of cases, not the more feared geometric development. New cases began dropping sharply in Hong Kong in April and May 2003 and, in that month the stock market bottomed and the property market shortly thereafter. The opportunity for investment was truly substantial at that time – an example of what James Montier at GMO would call “a fat pitch” in baseball terms. The 12 month return on the Hang Seng Index from that low was 45%.

Epidemics, both ancient and modern have recognisable patterns that repeat: the enervation of primeval fears, the surge in media mentions looping into elevated and obsessive communications. The exchange of information becomes so overwhelming that the positive effects of better protection, hygiene and antivirals is less well mapped and can easily be missed. “Once the faintest stirring of hope became possible, the dominion of plague was ended.”

Epidemics are a little bit interesting to the numbers minded. When the basic reproduction number is above 1, the disease in increasing in its infectious power, when it is below 1, it is falling. Each outbreak of disease has a distinct range, but these are averaged ex post and need not be consistent across outbreak centres and certainly vary with a mutating virus.

Investors should, though, take care in applying post SARs investment fundamentals to the present nCoV scare. The 1.3%-2% fall in headline equity indices on 27th January could only be considered large when compared with the trivial corrections of the past 12 months. We remain in expensive and momentum driven markets and the opportunity set is nowhere near as good as it was in 2004. It should be remembered that – as travel restrictions bite – China was just 5% of world GDP in 2003 but 17% today.

Looking at more medium term measures, statistical measures of sentiment are flashing red even if more fuzzy and subjective polls of investor sentiment do not exhibit quite such exuberance. We should be impressed by the power of trending markets to shrug off topical threats such as the 3rd US Presidential impeachment in history, a further fracturing of relations in the Middle East, climate disasters and trade wars. “Stupidity has a knack of getting its way”.

With these fairly acknowledged, we remain in that uncomfortable space where it has long  been difficult to connect the traded prices of financial assets with “the cycle”. The cycle has been both elongated and distorted. The resultant risk – not proximate perhaps but out there for sure – is that deep corrections in the prices of financial assets become themselves an economic event.

A final thought from Albert: “Everybody knows that pestilences have a way of recurring in the world; yet somehow we find it hard to believe in ones that crash down on our heads from a blue sky. There have been as many plagues as wars in history; yet always plagues and wars take people equally by surprise.”*


*All quotations from The Plague (La Peste) by Albert Camus written in 1947

By |January 29th, 2020|

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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

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.


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 task in the world of materials where products can be readily substituted, in many cases.

To some extent 3M is the victim of its own successes: its ranges have been extended so successfully that each new augment provides progressively less revenue potential, on a proportionate basis. It has branched overseas: developing mid markets beneath its upper markets. With this push largely achieved its products are at risk from the blurring of mid and lower tier products with the lower tier given more prominence via growing price transparency afforded by retail platforms.  Buyers find themselves less motivated by brand as they are encouraged to trade off quality and brand perceptions against price.

The visible merits of 3M lie in its commitment to R&D, although it would be dangerous to assume that past successes can simply be extrapolated forward, it’s impressive margins (21% operating margins) and ROIC but these speak more of past successes than future opportunities. Finally, 3M has paid an increased dividend in every one of the past 61 years and a dividend for the past 100 years.

Management attention has been drawn into managing in a low growth environment as the company has begun to lose its GDP-plus reliability and growth rates descend back to underlying global growth rates, or even below. Inevitability, rounds of restructuring become the new norm, mixed in with the persistent drum beat of litigation surrounding past products toxicity.

Reckitt Benckiser

Reckitt Benckiser has been an investment in the Global Leaders portfolio since 2015, it has generated a total return of 18.8% since first investment, the position has been sold in full.

The consumer packaged goods industry is going through a disruptive transition where niche brands and private labels are gaining market shares over established players. Millennials, in particular, bear less allegiance to brands in less glamorous household categories, and private labels have seen increased penetration, even among the high-income demographic. Digital marketing initiatives has brought down the cost of expansion of new brands, whilst online distributors’ infinite shelves and AI driven reviewing systems often display relatively unknown brands in an analogous fashion to branded goods. Where we see resilience is in the upper reaches including luxury segments where prestige branding still holds sway and are positively accented by social media influences (‘the Instagram effect’).

Even in Emerging Markets, the growth driver over recent decades for many multinationals, we are seeing more competitive pressure as local players gains an edge with comparable quality goods and in many cases more innovative products and marketing strategies tailored to their home market. Some established players have navigated the trends better, Nestle for example,  by embedding themselves into high growth and high margin segments such as coffee and pet nutrition, with an acute awareness of local preferences.

Reckitt Benckiser faces considerable challenges in this environment. The owner of well-known brands such as Dettol, Durex and Nurofen have experienced a series of unfortunate events over the last few years, compounding the negative industry evolution. The company is suffering from low growth syndrome. Having been a stellar performer historically with best-in-class margins, what concerns us the most is the negative trend in the wider industry unanimous to global consumer groups, and Reckitt’s ability to successfully navigate exogenous growth problems in their product categories.

Neither of Reckitt’s two business units – Health & Hygiene Home – are immune. Household products such as detergents and disinfectants, an important category for Reckitt, is one that sees little differentiation and path to future product improvement. It makes for easier choice when it comes to downgrades by the consumer to a white label replica on value considerations unlike food & beverages, where consumers are highly specific about their taste partialities and sentimental attachments. In consumer health, Reckitt bets on higher growth potential as it builds up its portfolio with infant nutrition, supplements and OTC drugs. However, competitive pressures have also crept into OTC as generics and private labels such as the launch of Amazon’s own label Perrigo brand poses challenges to Reckitt’s own brands Nurofen and Mucinex.

Even if the company can return to market growth, we now envisage a cap of 3-4% growth at the top-line. Margin pressures are also likely to persist as the company needs to accelerate investments significantly both in product innovation and marketing to regain market share and restore trust.

The RB2.0 Strategy, introduced in 2018, is reorganising the group into two business divisions, with separate management and P&L accountability, providing an option for a spin off down the road. A new CEO, Laxman Narasimhan, joins in September and his background at PepsiCo and Mckinsey suggests he will be familiar with the issues in hand. However, whilst the general view is that Reckitt’s problems have been largely self-inflicted and company specific, the view we have taken and the reason we are recycling capital out of this name into other holdings is that the challenges facing large branded goods companies with sub optimal portfolios will prove exceptionally difficult to box out of.


Nidec Corporation (listed in Japan) is a new addition to the Cerno Global Leaders Strategy. Nidec is the top global supplier of brushless Direct Current (DC) motors, accounting for around a half of all production. Domiciled in Japan the group is truly global with production sites across Europe, Asia and North America.

Motors are simply any power unit which generates motion. An electric motor converts electric power into motive energy. They work via a current creating an electromagnet, which is then used to power a core spindle around. Brushless DC motors combine superior attributes of small size, large power output, ease of connection and positioning control.

This is not a new technology. Brushless DC motors became possible after the development of solid-state electronics in the 1960s, and Nidec began producing them in 1975. However, unlike many products, the applications of advanced DC motors have proliferated over time. This derives from the integral nature of the technology to the secular trends of electrification and mobility. Where these themes collide you will tend to find DC motors.

Two additional undercurrents have favoured Nidec: the drive for efficiency and reduced scale. 50% of the world’s electricity is consumed by motors. The economic and regulatory necessity of increasing the output ratio from this level of consumption is a powerful one. Likewise, the demand for ever declining scale appears relentless. Nidec’s ability to bring innovative products to market which do more while taking up less space has been central to their success. It is our observation that these forces are powerful and ongoing providing long term support for the company’s core IP: the production of small, efficient motors.

The breadth of the company’s offering stems from this wide applicability. Its revenue verticals are diverse, from IT equipment and factory automation to EV traction motors and camera shutters. To some observers their product portfolio might appear to lack a ‘killer product’, a ‘game changer’. But this is its strength, in our view. Most products are not flashy, but they are enablers, and hard to substitute.

The evolution of Nidec’s portfolio offers some insight into the importance of its management and corporate philosophy. Led by CEO and founder Shigenobu Nagamori the group has created a dynamic philosophy focused on the continuous search for adjacencies in products, technology, markets and customers. This enabled the company to diversify away from the original core business of hard disk drive motors in 2006, well ahead of the end of the PC boom. The business now accounts for just 12% of revenues, although Nidec holds a market share of 85%. The group’s focus since 2010 has been to reposition the portfolio towards Automotive, Appliance, Commercial and Industrial sectors through some 34 acquisitions. AACI verticals now account for 55% of sales. Despite this flurry of activity the group has maintained its first quartile return on capital profile through improving acquired businesses and gaining synergies with the core.

Given the central role of Mr Nagamori in this strategy succession risk is a concern. Comfortingly the company has been proactive in this regard, promoting Executive VP Hirojuki Yoshimoto to President in 2018 with Mr Nagamori focusing solely on his CEO role.

This ability to persistently locate opportunities in adjacent domains instils a robust ability to adapt and remain relevant. The group’s position is further buttressed by a deep patent portfolio, switching costs and the multi-disciplinary technological expertise needed to produce advanced motors.

Since 1997 Nidec has delivered compounded sales growth of 14% per annum with operating profits expanding at 15% over the same period.


“Whatever happened to Microsoft?” the Guardian[1] mused in August 2012. In some respects, this might have appeared an odd question. The company dominated the PC market via Office and Windows, while it also led in the corporate server market. At a market cap of US$220bn the company was still one of the biggest in the world.

However, while its core business was nigh-on impregnable, strategic missteps had left it on the side lines of key consumer trends, most notably the smartphone and social media. In 2012, the iPhone brought in more revenue than all of Microsoft’s products. While the group held a small stake in Facebook its participation in the secular megatrend of interconnectedness was minimal. The most damaging factor was the speed of change. Apple had created the smartphone market from nowhere only 5 years earlier; Microsoft’s Steve Ballmer infamously declared at the time it had “no chance”. Facebook was about to welcome its billionth user 6 years after launch. Microsoft’s reaction function was to chase the pack, in all directions. The group embarked a series of misadventures including, acquiring Nokia for €7bn.

This flailing added to the perception that Microsoft was a yesterday company. As the Guardian pointedly put it, “Microsoft was once an incredibly rich, smart, agile, innovative, competitive and aggressive company. Today only the cash reserves and the aggression, personified by its current CEO Steve Ballmer, remain”

Microsoft, in its current state, is at once familiar and unrecognisable. The business has leveraged the dense network power of its core dominance in home and office computing to push hard into the provision of commercial cloud services. Azure, its cloud infrastructure business, now accounts for one third of revenues, and by market share is second only to Amazon Web Services. The complexity of migrating commercial workloads in full to the cloud has created enhanced demand for a hybrid environment of public cloud and physical server. This has brought the legacy Windows server business into play. Microsoft is the only leading cloud provider capable of providing hybrid environments, which are likely to become the dominant cloud paradigm. In a 2018 a survey of corporate CIOs by JPM Microsoft was far and away the most ‘critical’ cloud platform, polling 10 points ahead of Amazon.

Azure Hybrid Environment. Source Microsoft

The reversal in Microsoft’s fortunes can be traced back to the appointment of Satya Nadella as CEO in 2014, following the retirement of Steve Ballmer. Mr Nadella joined Microsoft in 1992 and worked his way up to a variety of business and leadership roles across multiple product lines. The business he inherited had many of the tools required in its locker. The problem was the locker also held a clutter of other expensive, less useful tools. What Mr Nadella brought was a singular vision focused around the cloud, a business which he had helped build in his previous role. He also led a rapid process of portfolio management, selling Nokia after taking a full write down and acquiring strategic businesses in LinkedIn and GitHub.

The second critical shift has been to move the company culture towards a more collaborative, open stance. Microsoft was historically an active opponent of open source, seen by most independent developers as Enemy #1. Mr Nadella has emphasised user experience over short term market share partnering with a number of rivals to integrate Microsoft products onto their platforms. This flies directly in the face of the jealous protectionism of the past, but creates a more flexible and faster growing business at the other end.

We have been assessing Microsoft as a potential inclusion in Global Leaders for a number of years. The businesses we seek to own need to display convincing proof of concept in their core business. The early phase of this rejuvenation of the business was transitional and it is our view that the runway for growth is a long one. The disruption potential for commercial cloud is vast. Only 14% of the market has been penetrated with some US$630bn to play for, according to GS. Microsoft is uniquely positioned to benefit given its hybrid offering. At the user interface its Office product offers a compelling path of least resistance that allows the company to replicate and repel new entrants. Slack represents a case in point. The much-hyped work chat unicorn is now public with a market cap of US$15bn, 10x revenues. But it makes no money, its most recent financials showed an operating loss of US$166mn. Microsoft’s response was Teams, which effectively offers the same sharing function but is integrated for free into the interface for the Microsoft 365 user. Eventually Slack will have to charge for its services tipping the balance further towards Microsoft. This incumbency effect helps perpetuate a wide moat around the business, giving Microsoft time to respond to disruptive new challengers as they emerge.



In 2017, Royal Philips, the Dutch company known for its lightbulbs and electric shavers, was reclassified into the Healthcare sector from Industrials, having undertaken a multi-year corporate transition to shift its portfolio from electronic goods to providing more personal and professional healthcare solutions.

Once the largest European consumer electronics conglomerate, Philips was famous for its industrial and fundamental research, pioneering cutting-edge products from compact cassette recorders in the 1960s to integrated circuits and transistor technology in the 2000s. Many companies today share their roots with Philips, including the leading semiconductor equipment makers ASML and NXP; and Universal Studios, whose previous life as PolyGram (founded by Philips), was the largest global entertainment label in the 1970s.

Despite being an innovation powerhouse, Philips made the classic conglomerate mistake of losing strategic focus owing to overdiversification, bloating its empire with unconnected low margin businesses. At its peak in the 1980s, Philips operated 13 major divisions and over 120 businesses across electronics, appliances, medical systems, entertainment, lighting, components and semiconductors, employing a massive workforce of 380,000 people. The indigestion was felt keenly when the company almost went into bankruptcy in the early 1990s. Its television tubes and lighting business was at risk of commoditisation from Korean and Japanese rivals, its chain of video stores were bleeding cash, and their foray into mobile phones was disastrously loss-making. On top, Philips as a company was mired in bureaucracy.

Turning around a supertanker was no easy feat. It took three CEOs over 20 years to restructure the company into its present slimmed down form. Mr. Boonstra’s arrival in 1996 set in motion a series of divestitures to weed out non-core activities, selling over 40 businesses, including Grundig televisions and music label PolyGram, shrinking the number of divisions down to five. His successor Mr. Kleisterlee continued this trajectory, spinning out its crown jewel semiconductor division, which, at one point was the single biggest contributor to group earnings. He also proposed belt-tightening initiatives to reduce overheads via outsourcing and improving efficiency by encouraging cross divisional collaborations.

Current CEO Mr. Frans van Houten, who joined in 2011, has gained a reputation for driving hard decisions. He established the long-term strategic direction of Philips to focus on healthcare technology, shedding the remaining television and entertainment businesses, and separately listing its lighting business, in which Philips still owns a residual 15% stake. This represents the last vestige of the lightbulbs business that traces back to the origin of Philips in 1891, with the aim to sell down the full position within the next two years (already sold down from 30%). Further, to increase profitability in line with competitors, he has pledged a target to increase group margins by 100 basis points per year with the proposed closure of 20 factories worldwide and to optimise the remaining 30 for higher productivity

Today, Philips is a much more streamlined company with three outstanding divisions: Diagnostics & Treatment, Connected Care & Health Informatics, and Personal Health. Healthcare now represents over 60% of total group revenues, with offerings spanning large medical devices including MRI scanners, X-ray and ultrasound machines, where Philips competes primarily with Siemens Healthineers and GE Healthcare with mid-teens market share. It is also a leader in surgical tools for image-guided therapy (>40% share) such as cathlabs and smart catheters, and sleep & respiratory care devices to treat people suffering from difficulty breathing (high margin duopoly with 45% global market share). The rest is represented by the Personal Health segment, selling consumer products and small domestic appliances, such as electric shavers and powered toothbrushes (under the Sonicare brand), where Philips is a global leader with 45% and 30% market share, respectively.

Philips Azurion: Next Generation Image-guided Platform

The company is also striving to become a ‘solutions’ provider with a more entrenched position in chronic care, an area of increasing importance as the global population faces an ageing epidemic. With 60% of their R&D personnel working on data analytics, Philips is stitching together service and software with hardware sales to provide a more comprehensive offering to both patients and surgeons. By enabling connectivity and data analytics, it facilitates real-time patient monitoring and superior decision-support to the surgeons, helping to improve diagnostic accuracy and drive down the cost of care by keeping patients out of hospitals. This move aims to drive greater recurring revenues, which Philips expects could eventually become 35% of group sales.

Philips is the fifth healthcare addition to our Global Leaders portfolio. Armed with a more appealing corporate profile and clearer future vision, the company is on track to deliver 4-6% growth and margin expansion beyond 2020. It has a proven track record of innovation, and is able to leverage its 65,000 strong patent portfolio, bridging insights from its unique exposures to both consumer and professional healthcare markets. Its competitive position in the diagnostic & imaging market is characterised by a large installed base and high switching costs, and in the consumer segment it enjoys strong branding, where it plays in the higher-end markets with less competitive pressures and higher recurrent revenues (replacement blades and brush heads). While there is still much work to be done as the reshuffle close in on its final phase, we believe Philips will be able to execute their digital strategy and morph into a tech-enabled healthcare company that can stay embedded and relevant for the long-term.

Fund Facts

Fund Size £69.7mn
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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