The boutique fund that shops for winners...

INVESTMENT house Cerno Capital is a small ‘boutique’ fund manager, based in London’s West End – before lockdown sent its 16 staff scattering to all corners of the country.

It runs assets of £650 million and manages three investment funds aimed at the public. Among them is the £ 111 million fund Cerno Global Leaders, managed by James Spence, co-founder of Cerno, since launch just over three years ago.

The fund is interesting on many levels. First, the portfolio is a concentrated one, with only 24 holdings – or as Spence describes the fund ‘high conviction’. At no time are there more than 30 company stakes.

Second, each holding has roughly the same weighting in the portfolio although Spence says ‘we don’t touch the rudder every day’.

This approach means gains from winning stocks are quickly banked and used to increase positions that have not performed as well. ‘We buy into share price weakness,’ adds Spence, ‘and sell into strength. The idea is that every company whose shares we own can make a meaningful contribution to the fund’ s overall performance.’

Third, although the fund’s ‘global leaders’ title suggests that its portfolio comprises many of the world’ s leading brands, this is not the case. Although the likes of Johnson & Johnson, Microsoft, Nestle and Samsung are held by the fund, there are a number of lesser known companies. For example, Swissbased flavours and fragrance manufacturer Givaudan and US based Aptiv – designer and manufacturer of the electronic ‘brains’ behind most cars.

‘We look for companies that are consistently profitable, have strong balance sheets and are likely to continue to be winners in t he future,’ says Spence. ‘Sometimes, they are leaders in areas far away from the eye of the consumer. A food company will s el dom develop a new product without an input from

Givaudan. Similarly, Aptiv’s electronic systems are embedded in most leading car brands. In my eyes, it’s a better investment opportunity than opting for a holding in Tesla or BMW.’

Spence says there are some 500 to 600 stocks that he keeps tabs on. Sectors that he avoids include banking and commodities (too cyclical) as well as companies involved in tobacco, armaments and the mining of fossil fuels.

Spence’s modus operandi is moulded around holding companies for the long term – 12 of the stocks have been in the portfolio for at least five years.

‘For us to trade stocks,’ says Spence, ‘it is either because our investment thesis failed – the company we thought would be a winner turned out not to be one – or a company’s valuation becomes so stretched it makes sense to take profits.’

The result is low portfolio turnover although last year was an exception as a result of the coronavirus.

Ahead of the global pandemic in March last year, Spence disposed of four US holdings – Federal Express, Oracle, Rockwell Corporation and Waters Corporation. Late last year, he also disposed of a stake in engineering firm Ansys after its valuation‘ became extended’. The only purchase was a new position in Aptiv.

The fund’ s performance numbers are strong. Since launch, Cerno Global Leaders has delivered an overall return of 55 per cent – comfortably ahead of the average for global investment funds (a return of 37 per cent) and the performance of the FTSE World Index (up 40 per cent).

The fund is not suited for income seekers. Its stock market identification code is: GB00BF00QK62 and the annual charges total 0.87 per cent.