Cerno Capital’s investment philosophy was born in the spectacular boom and bust of Asia in the 1990s.
Managing partners and co-founders Nick Hornby and James Spence witnessed first-hand both the giddy euphoria and the depths of despair while learning the ropes out in the Far East.
Hornby joined Cazenove straight from university – where he graduated from Bristol with an economics degree – in 1990, and very quickly found himself posted out to Hong Kong, where he first met Spence.
‘We were both property analysts,’ he recalls. ‘It was a great time to be out in Asia because China was just beginning to open up. It was the first time that Chinese stocks listed on the Hong Kong Stock Exchange, in 1992-93, and the Chinese were just starting to come over for shopping.
‘It was the beginning of the boom and the Hang Seng index went up from 4,000 to 12,000 between 1991 and 1994. Three years after, in 1997, we had the Asian crisis. So the beginning of our careers were shaped by a spectacular boom and then bust, which was very good training.’
Hornby returned to London in 1995 with a move to CLSA, although he continued to travel to the region regularly. The company went on to become one of the most successful Asian broking businesses in the City and he made the ‘fantastic’ call to reinvest his earnings in its stock.
By the time he left CLSA – which was one third owned by staff – in 2005, he was one of its largest shareholders. The company went on to be part-acquired by Chinese firm Citic Securities the following year, before being completely bought out in 2013, netting him a healthy profit.
Hornby says he knew that he always ‘wanted to be in control of my own destiny’ and with Spence having also returned to London in 2005, the pair teamed up to found Cerno.
‘Working for an investment bank is quite a different proposition to a boutique like Cerno,’ he says.
‘I wanted to take the things I had learnt, particularly what doesn’t work at a big firm, and build a business centred around the clients. At CLSA the clients were considered the most important thing, but that certainly wasn’t the case everywhere.’
Cerno’s proposition was straightforward: a global multi-asset approach to discretionary investment management, backed by strong service.
‘Because we began our careers in Asia, we made a clear effort when we started that Cerno would not just invest in Asia – we wanted a core global multi-asset approach, which [remains] 96% of our assets,’ Hornby says.
He admits it was tough in the early days, with the pair initially managing to raise £25 million from friends and family at launch, but he says that they were fortuitous with their timing.
‘Luckily, in 2006 and 2007, a lot of entrepreneurs were selling their businesses,’ he says.
‘With £25 million we just had a beginning, not a business, but two businessmen had just sold their companies and they gave us £150 million. We then had a business and since then the focus has been on trying to do a good job for our clients.
‘At that point we didn’t really have a long track record, so it was all about trust and they are both still with us as clients today.’
More client wins followed, with Hornby and Spence relying on word of mouth and referrals, conceding that they never really ‘worried too much about sales and marketing’.
But as the business matured – now topping £420 million assets under management, with the firm generating a £1.7 million operating profit on £3.2 million turnover in the year ended 31 March 2016 – the pair realised that they needed to build up the team to ensure it could cope with the increased client interest, while maintaining its focus
Last July, they hired Jonathan Reed from HSBC as a private client director, and ex-consultant Olivia Martin for its sales team. The latter has also been boosted with the recruitment of Tom Milnes, who joined from Investec Wealth & Investment as business development director in January.
They join recent hires Katie Dodd, who arrived from Savills to lead the company’s marketing strategy, and Michael Flitton, who was recruited from GLG Partners as an analyst in April.
‘In the early years of our business’s life, the clients you could attract were individuals who controlled their wealth themselves. As the business has matured, particularly recently, we’ve had significant interest from intermediaries and consultants of wealthy individuals, but there is a limit to how much time James and I can spend on it,’ Hornby says.
‘Over the last year or so we’ve been asked to a lot of beauty parades, which is a new development and a good sign. Consultants have effectively endorsed us, which I find very encouraging.’
Besides the team, Cerno has also been expanding its proposition and working on building its brand.
The company has favoured more offbeat opportunities for sponsorship, such as Hannah White and Project Speedbird – her attempt to break speed sailing records, having set a new fastest time for a dinghy crossing of the English Channel in 2015 – and funding a Getty Images internship, with the winner to produce an exclusive exhibition for the firm.
The more diverse scope of the business’s activities is also reflected in Cerno’s ever-broadening proposition. The company has introduced a Tier One visa service, which Hornby believes can both diversify the client base, while attracting new money.
Despite the shock EU referendum vote, Hornby remains upbeat about its prospects, saying: ‘I don’t think Brexit will affect it particularly. People that want to come to the UK will still want to come, the US post-Trump is relatively less attractive. If you’re a Chinese family, Brexit is almost irrelevant.
‘It’s about the service and how you look after them. If you have a relationship for five years, it potentially opens doors in other areas.’
The next focus is on bring to market a fund in the second half of the year. The firm launched a unitised version of its core multi-asset strategy, TM Cerno Select, back in September 2013, but is to strip out one of the individual underlying strategies within it as a standalone vehicle.
The Global Leaders fund will be based on the strategy that forms the core equity component of Select, which is run as a concentrated and unconstrained portfolio of 25 high quality international blue chip stocks. Within it, the pair look to identify leaders in their field that have strong cash generation and high barriers to entry, with the stock positions equally weighted with regular rebalancing.
Global leaders currently comprises around 25% of the Select fund and has helped underpin its performance. The fund has returned 27% since launch in September 2013, outstripping its target of the UK CPI +3%, which rose 14.9% over the same period.
‘We’ve had significant interest in it. For wealthy families with a long-term view, building a portfolio of leading global businesses is the best way to invest their capital over the long-term.’
He said the idea actually came from a conversation with a long-standing client. ‘One of our wealthy clients’ families had had shares in a global consumer company for over 100 years and they asked us to find them 20 more,’ he said.
Meanwhile, the firm has also brought a Cayman Island-based Asia and emerging markets fund that it had been running quietly in the background onshore in a Ucits structure.
The Pacific & Emerging fund, slightly unusually, takes a multi-asset approach to investing in the region, which Hornby says is designed to ‘give exposure to the upside, but dampening the volatility’.