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 Managerren@cernocapital.com

Michael Flitton - Co Managermichael@cernocapital.com

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

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

Tom Milnes0207 036 4126tom@cernocapital.com

Key Fund Information

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.

Cerno Capital Partners LLP 34 Sackville Street, London, W1S 3ED Telephone: +44 (0) 207 036 4110 Website: cernocapital.com