The Cerno Pacific & Emerging (P&E) portfolio is a geographically specific fund. Formed to tap the considerable expertise of the firm’s investing partners, it invests throughout Asia Pacific, including Japan and Australia, and the wider global Emerging Markets. As the manager believes the best opportunities in these markets derive from long term investment in companies operating in, or selling to, the region, equity is the dominant investment asset class. The fund may invest in active managers, investment trusts, ETFs and individual securities. The manager may moderate equity exposure by investing, directly or through funds, in the bond and currency markets of constituent countries and other complimentary assets such as Real Estate Investment Trusts. The manager takes an active approach to currency exposures and may hedge when deemed appropriate. Q3 18 Investment Report Fund Managers Fay Ren - Co Manager [email protected]Michael Flitton - Co Manager [email protected]Fund Activity Position changes in the portfolio during the quarter. Zozo Inc’s New Model for Clothing Bringing affordable customisable clothing to the masses Alibaba and Amazon Which is the Friendlier Company and Why This Matters? NAV/Share at end Sept £11.15 Fund Size (£mn) £10.0mn Currency Share Class GBP (Base) ACD Thesis Unit Trust Mgt Custodian Northern Trust Legal Structure OEIC (UCITS) Inception Date - Fund Jan 2017 Inception Date - Strategy Oct 2009 Saving Structures SIPPs & ISAs Share Type Acc & Inc Fund Data UCITS Regional Multi-Asset Portfolio Q3 2018 TM Cerno Pacific and Emerging Investment Objectives
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TM Cerno Pacific and Emerging - Cerno Capital...On Alibaba’s Taobao/Tmall, individual sellers and international brands can all have fully customised shopfronts, a shop-specific customer
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The Cerno Pacific & Emerging (P&E) portfolio is a geographically specific fund. Formed to tap the considerable expertise of
the firm’s investing partners, it invests throughout Asia Pacific, including Japan and Australia, and the wider global Emerging
Markets. As the manager believes the best opportunities in these markets derive from long term investment in companies operating
in, or selling to, the region, equity is the dominant investment asset class. The fund may invest in active managers, investment
trusts, ETFs and individual securities. The manager may moderate equity exposure by investing, directly or through funds, in the
bond and currency markets of constituent countries and other complimentary assets such as Real Estate Investment Trusts. The
manager takes an active approach to currency exposures and may hedge when deemed appropriate.
Position changes in the portfolio during the quarter.
Zozo Inc’s New Model for Clothing
Bringing affordable customisable clothing to the masses
Alibaba and Amazon
Which is the Friendlier Company and Why This Matters?
NAV/Share at end Sept £11.15
Fund Size (£mn) £10.0mn
Currency Share Class GBP (Base)
ACD Thesis Unit Trust Mgt
Custodian Northern Trust
Legal Structure OEIC (UCITS)
Inception Date - Fund Jan 2017
Inception Date - Strategy Oct 2009
Saving Structures SIPPs & ISAs
Share Type Acc & Inc
Fund Data
UCITS Regional Multi-Asset Portfolio
Q3 2018
TM Cerno Pacific and Emerging
Investment Objectives
ZOZOSUIT, pictured bottom left. Using a smartphone camera
this stretchable all-in-one can take accurate body measurements
from the comfort of the users’ home. The group crunches user data
to automatically allocate the optimal size. With machine learning
allowing the optimal inventory to be held it should be possible
for customers to receive custom fit clothing the following day.
The concept is novel and untested. Guinea pigs at Cerno Capital
report the app is slightly temperamental however the process
is simple and only needs to be completed once. As a white-
space product, the potential market is vast. Our holding in
the company is small to reflect the diversity of outcomes and
will be calibrated as we gain clarity over customer uptake.
Start Today is a good example of the type of company we are
trying to find for the portfolio. The group has come a long way
from its genesis in 1998 selling Mr Maezawa’s CD collection
amassed during a sojourn in the US post-high school. His
company today is an exciting example of what might happen
when innovation is paired with disruption in a traditional sector.
- Michael Flitton
Fund Activity
Prior to last month, Yusaku Maezawa was best known by
many outside Japan as the maverick billionaire who rattled
the art world with back to back record bids for works by
Basquiat in 2016 and 2017. However, this outlay is likely
to pale next to his recent commitment to claim all the
available passenger seats on SpaceX’s first private trip
around the moon for himself and a select cadre of lucky
artists. His ‘#dearMoon’ art project seeks to be a catalyst for
creativity. ‘What if Picasso had gone to the moon?’ he mused.
Mr Maezawa’s vision has helped drive his company, Start Today,
to dominance among the trend-conscious segment of Japan’s
online fashion malls. Success has been supported by a low-
touch, plug-and-play offering and careful curation of third-party
brand value. However, its fashionista following is now such that
underlying penetration rates in its core demographic may be north
of 50%, suggesting future growth may be stymied by saturation.
This has forced the group to explore new avenues for growth.
The result is an innovative, and potentially highly disruptive,
thrust into the world of private labels. This is, however, private
label with a twist. Mr Maezawa’s vision is to bring affordable
customisation to the masses. The vector of this vision is the
Affordable customisation to the masses. Source: Yusaku Maezawa
Zozo Inc’s New Model for Clothing
In Q3 the fund generated a return of -2.9%, a disappointing result against a relatively flat benchmark. Some of this divergence can
be attributed to the relatively high weighting in the index to Japan (39%) and Australia (11%), both of which proved extremely
resilient during the quarter. We made several adjustments to the portfolio, notably exiting our longstanding position in Mexican
sovereign bonds. We also used a recent tender offer by the board at Genesis Emerging Markets to begin selling down our position
and have now fully exited. The proceeds from these sales have been used to increase our cash position, which now stands at 18%,
add to existing holdings and initiate new positions. New allocations include Hikvision (global leader in security technologies),
Han’s Laser (Chinese developer of advanced laser solutions) and Shima Seiki (Japanese producer of automated knitting machines).
a bricks and mortar shop operating online purchasing third
party goods and carrying inventory. This distinction drives
differing profitability; since 2011 40% of Alibaba’s revenue
has been converted into free cash flow against just 4% for
Amazon while Alibaba’s e-commerce operating margins are
10x higher. Amazon has belatedly transitioned to a platform
model with third party accounts now over half its sales today.
While the two business models may now be converging, their
historical starting points have engendered widely different
relationships with the retailers who sell via their platforms.
Many headlines have pointed to the threat that Amazon
poses to retailers online and offline, whereas little of this
nature has been said of Alibaba. It is generally seen to be
working with merchants rather than against them, facilitating
entrepreneurship and trade by bringing merchants online
and giving them access to its enormous customer base.
For your writer: a user of both Alibaba and Amazon, the
noticeable distinction is the preservation of the merchant’s brand
and identity on the former platform. (See Screenshot overleaf)
On Alibaba’s Taobao/Tmall, individual sellers and international
brands can all have fully customised shopfronts, a shop-specific
customer service in the form of an instant chat, and options
for shoppers to ‘favourite’ and ‘follow’ them, creating user
engagement and encouraging repeat sales with personalized
updates on new product and discounts via new advertising
formats such as micro-feeds or livestream broadcasts embedded
within the app. Amazon’s website in contrast appears designed to
eliminate brand value. All items are laid on display shelved under
one roof, buying decisions are driven by price and reviews, the
third-party vendors stay largely anonymous and the importance
of branding can feel somewhat diluted. We have written
previously on Amazon’s deliberate strategy of brand targeting.
Whilst usability clearly matters, does friendliness? US
tech companies are, stereotypically, founded and driven
by hyper-intelligent and socially awkward individuals
with strong controlling drives. This does not necessarily
make them natural custodians of wide platforms where
inclusivity and fairness are important fundamentals.
With a dominant domestic e-commerce market share of 83%
Alibaba and Amazon: Which is the Friendlier Company and Why This Matters?
Alibaba is the largest e-commerce company globally
by GMV (Gross Merchandise Value) and one of the
most recognisable faces of modern Chinese capitalism.
The company took its name from the Arabian folklore
‘Ali Baba and the Forty Thieves’. In the story, the phrase
‘Open Sesame’ opens the secret door to a cave of treasures,
mirroring the name of Alibaba’s retail shopping site ‘Taobao’,
which translates to ‘finding treasures’. Indeed, one can find
on their website everything from boring household items
to the exotic (pet foxes and visa agencies, as examples).
The company is often compared with its US rival Amazon,
both having their genesis and core business in e-commerce,
with cloud and digital entertainment at the periphery.
Alibaba is also a pioneer in the Chinese mobile payment
sector through Alipay, a market Amazon has yet to enter.
Despite apparent similarities the two companies’ approach
to e-commerce is crucially different. From the outset,
Alibaba has pursued an asset-light model, positioning itself
as a platform for third-party vendors. Amazon, by contrast,
was historically what is termed a First Party (1P) business:
To make it easy to do business anywhere. Source: Alibaba Group
Alibaba and Amazon: Which is the Friendlier Company and Why This Matters?
and sporting over 600 million monthly active users, Alibaba
handles more transactions than Amazon and eBay combined.
They have access to a wealth of user data that can be leveraged
to drive operational efficiency and enhance user experience,
given their position as a leading AI powerhouse. Their cloud
business (6% sales), while still loss-making, is the leading
provider in China. If Amazon’s success in cloud is anything to
go by, where it generates the lion’s share of Amazon’s profits,
this could present a huge growth opportunity as the structural
migration for businesses gain momentum. Concerns have been
voiced on the excessive expenditure in expanding its emergent
businesses, including offline and international retail, digital
entertainment and offline-to offline formats (such as food
delivery). These are all highly competitive and capex intensive
fields, pivoting away from its traditional asset-light model and
we should expect to see margin contraction in the medium term.
However, we do not believe that the company has lost sight of
its core market (remembering it still represents 86% of group
sales), with value-added initiatives to strengthen relationships
with both existing buyers (VIP schemes) and sellers (analytics)
as well as growing potential users and integrating different
segment of its business to reinforce its network effect.
This summer has been an eventful one for with the surprise
retirement of its founder and spiritual leader Jack Ma, and a
change in sentiment towards Chinese equities in general. We
now see Alibaba as good value: the stock trades at a quarter
of Amazon’s EV/Sales, half its Price/Earnings, and generates
twice the cash flow on a projected >30% headline growth.
Founded on the cusp of the new millennium in 1999, the company
has the ambition to live for 102 years (we didn’t make this number
up), at which point it can cheekily claim that it has spanned three
centuries. Few tech companies have achieved this feat, General
Electric (1890) and IBM (1911) are two of them. Many things
can happen in the next 83 years, but Alibaba is alive and well yet.
- Fay Ren
The homepage of a randomly selected torch shop on the Taobao app Source: Author Screenshot
Allocation by Theme
Track Record
Top/Bottom Quarterly Contributors
Geographic Allocation (Ex Cash)
Note: Strategy since Oct 2009, fund launched on 27th Jan 2017Performance is based on a Net Asset Value (NAV) price basis with income reinvested, net of fees. Past performance is not a guide to future performance.
Top 5 Holdings Baillie Gifford Japanese Smaller Companies 8.2%
Matthews China Small Companies 8.0%
B&I Asian Real Estate Securities 7.8%
Michinori Japan Equity 7.6%
CC Japan Growth and Income 7.2%
Japanese Profit Cycle 23%
Pan-Asian Specialists 19%
Cash & Near Cash 18%
Asian Equity Basket 17%
China Specialist 8%
Asian Property 8%
Indian Profit Cycle 7%
Japan38%
Asia ex Japan24%
Global10%
India9%
China19%
Mexico LC Sovereign Bond
Baillie Gifford Japan Sm Co.
B&I Asian Real Estate
Genesis Emerging Markets
Sunny Optical
Matthews China Small Co.
Allocation by Asset Class Equity Long Only 74%
Property 8%
Cash & Near Cash 18%
1M 3M YTD 12M Since Launch
Fund (Class A) -2.9% -3.3% -5.3% 1.1% 11.5%
MSCI AC Asia Pacific 0.0% 1.7% 0.8% 8.1% 17.6%
- TM Cerno Pacific & Emerging (Class A) - MSCI AC Asia Pacific Index
ISIN:
GB00BDCJ9Z32
GB00BDCJB138
SEDOL:
BCDJ9Z3
BDCJB13
Bloomberg:
TMCPEAA LN
TMCPEBA LN
A Acc
B Acc
Fund Codes
Ongoing Charges
Counterparties
Contact
Class A Management Fee 1.00% Allocated manager’s Fees 0.27%Other Fees (Inc running costs) 0.86%OCF 2.13%
Class B Management Fee 0.75% Allocated manager’s Fees 0.27%Other Fees (Inc running costs) 0.86%OCF 1.88%
Authorised Corporate Director: Thesis Unit Trust ManagementTrustee: NatWest TrusteesCustodian: Northern TrustAuditor: Grant Thornton UK LLP
Disclaimer for TM Cerno Global Leaders: TM CERNO GLOBAL LEADERS (the “Fund”), which is a sub fund of TM Cerno Investment Funds, is organ-ised under the laws of the United Kingdom and qualifying as an undertaking for collective investment in transferable securities (“UCITS”) under Directive 85/611/EEC (as amended) and is regulated by the Financial Conduct Authority. This document is issued by CERNO CAPITAL PARTNERS LLP and is for private circulation only. CERNO CAPITAL is authorised and regulated by the Financial Conduct Authority in the United Kingdom. The information con-tained in this document is strictly confidential and does not constitute an offer to sell or the solicitation of any offer to buy any securities and or derivatives and may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of CERNO CAPITAL PARTNERS LLP. The value of investments and any income generated may go down as well as up and is not guaranteed. You may not get back the amount originally invested. Past performance is not necessarily a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments. There are also additional risks associated with investments in emerging or developing markets. The information and opinions con-tained in this document are for background purposes only, and do not purport to be full or complete. Nor does this document constitute investment advice. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by CERNO CAPITAL PARTNERS LLP, its partners or employees and no liability is accepted by such persons for the accuracy or completeness of any such information or opinion. As such, no reliance may be placed for any purpose on the information and opinions contained in this document.