TM Cerno Global Leaders2020-06-23T14:27:23+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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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

“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.


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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