Kernow Asset Management tear sheet for the month ended May 31, 2025.
Dear Investor,
The strategy gained 8.3% in May as the FTSE went streaking.
From mid-April, the UK FTSE 100 rose for 16 consecutive sessions. Its longest winning streak ever. That is not normal. That is liquidity chasing scarcity. This has never happened before, and we do not expect to see it again in our lifetime.
Read more hedge fund letters here
The smaller-cap AIM market has risen 20% from its lows. The most aggressive rise since December 2020. When small caps move like that, it is not just a bounce. It is positioning unwinding, sentiment flipping, and maybe even a broader rotation underway.
Everything we look at is going up. The last two stocks we bought have received takeover bids. Our shorts are staring at us menacingly. We are also seeing exaggerated upside reactions to moderate news. Take Burberry, for example. The stock increased 17% in a day on what were, at best, in-line full-year results. It is good to be a UK investor again.
Adriatic Metals Deep Dive has 20% Dividend Silver Lining
Ed flew to Bosnia to look at a low-cost silver mine. As you can imagine, we like to do deep dives on all our portfolio investments. We already had a small holding and started to top up the day after the visit. We were rudely interrupted by a low-ball bid from Dundee Precious Metals. It should be rejected.
The company is starting to make noise about what to do with US$150-200m of free cash flow starting next year. As one company executive said, “we could pay a 20% dividend next year and have no debt”. That would be perfect, and the subsequent share price re-rate would push the yield down to about 7%. A share price gain of 200%, assuming silver holds steady.
Of course, miners being miners, there is always the temptation to dig more holes. This rarely ends well. For over two decades, we have profited from companies that do one thing and do it properly. We have consistently made money in pure-play stories with capital discipline.
The diversified ones have ALL sucked. They dig in all directions at once and end up knee-deep in regret. Every single time. Long-term Russian roulette is not a great game.
The investor should carry out the diversification, not the management. This is now a test. If the team understands capital allocation, we stay long. If they start digging unnecessary holes, we step away. Simple as that. We shall soon find out whether this particular management team is made of steel and discipline, or just another bunch of optimists with shovels.
Trading the Obvious: Weather as a Market Inefficiency
Hollywood Bowl suffered a 10% share price drop as analysts cut targets in response to management stating that the weather had been exceptionally good. We were surprised the banks had not looked out the window for the last three months. If it’s sunny, you don't go into a dark bowling alley.
This stands in delightful contrast to our other retail stocks, which complain when it rains. We effectively own an ice cream shop and an umbrella retailer on the same street – a nice, natural hedge, and we can trade it. When the sun shines, we buy more Hollywood; when it rains, we sell some back. As such, we increased the size of our position by 30% on the day of the drop.
Weather trading has been a reliable and straightforward concept for us for over a decade. As many of you know, we met on a potato farm where we bonded over the idea of weather trading. There is no hidden analytical edge here. The weather is inherently unpredictable and is probably getting more volatile. Why this has not been arbitraged away in equities is a puzzle.
Repricing the Story: How Hiscox Rerated in Three Hours
Hiscox’s first capital markets day (CMD) was a success. It added £270m to its market cap on the day. Not bad for three hours’ work. We jest. A lot of effort goes into these things. Some are duds, and others work. CMDs are a type of storytelling ritual where companies attempt to rewrite their narratives. Look at the slides from Autotrader, Experian and Wise. They all spin the yarn similarly. Find the sweet spot between a bit of strategic tension and a believable promise, and you don’t just move your own share price. You nudge your competitors and shift the whole market’s mood.
We were left with the impression that Hiscox is full of smart and empathetic people in what is a ruthless industry. The combination of a human, client-first culture and a long-term reputation mindset, supported by technology, feels genuinely differentiated.
Aligned Incentives: CEO’s Payday is our Opportunity
Reviewing our portfolio, Metro is the next company overdue for a CMD. It plans to update its capital allocation policy and provide dividend guidance next year, setting the stage for a CMD in 2027. The CEO could receive a payout of up to £60m if he meets performance-based targets over the next five years, including the share price reaching 437p. This represents upside of approximately 300% from the current level. Good enough for us!
Since its inception in November 2019, the Kernow strategy is up 69%, compared with the UK equity market, which has increased 44% over the same period. The collective upside in the portfolio is worth more than 211%.
- Book(s) of the month: Countdown to Zero Day by Kim Zetter and DarkMarket by Misha Glenny
- Good month for: Rank Group, +49% on solid profit guidance
- Bad month for: Auction Technology Group plc, -23% on its earnings facing pressure
Kernow is a WINNER
We were thrilled to receive the award for Best Performing UK Equity Long/Short Fund in The Hedge Fund Journal Performance Awards 2025.
Party Time - Save The Date
Dear fellow Kernow investors, block out your diary! Our sixth anniversary party is scheduled for October 15th. It promises to be another fun evening.
All the best
Alyx Wood
Chief Investment Officer
Kernow Asset Management
See the full factsheet here.
