Kernow Asset Management factsheet for the month ended March 31, 2025.
Dear Investor,
The strategy declined 2.1% in March as trade war concerns intensified.
Macro fears are a constant in markets, and it seems this one has teeth. The impact on our portfolio last month came through a drawdown in Burberry, which erased gains generated by our other positions. Given its reliance on cross-border luxury demand, it was directly exposed to both tariff risk and rising recession fears.
Read more hedge fund letters here
Elsewhere, the fundamentals continue to do the heavy lifting. Galliford Try posted strong interim results for the first half of 2025, with profit at the top end of consensus estimates and revenue increasing 13% to £923m.
Berkeley Group also reaffirmed earnings guidance, projecting at least £975m of pre-tax profit across fiscal years 2025 and 2026. Management is focused and disciplined. The business has a market capitalisation of £3.6bn, sits on £500m in net cash, and holds £7bn in forward free cash flow orders. Of that, £1.5bn is contractually locked in. The execution plan is in place through 2035. Its return on equity target is 15%, which aligns with our minimum hurdle. In an uncertain environment, we are leaning into businesses with visibility, cash flow, and management teams that know how to allocate capital.
Hunting Season Has Closed
After reviewing its latest results, we exited the remainder of our small position in Hunting. The company reported a pre-tax loss of US$34m, compared to a profit of US$41m in the prior year. Following a direct conversation with management, it became clear that the catalyst had finished. The strategy has faltered, and under current leadership, the business shows no path to achieving a 15% return on invested capital. Operational discipline is lacking, and there is no sign that will change.
While we generated a return of slightly more than 100% (including dividends) since initiating the position, Hunting is now a value trap. The situation is straightforward. The company has the capacity to return nearly 30% of its market capitalisation to shareholders through a buyback with no execution risk. Instead, the CEO has made it explicit that capital will be directed toward acquisitions that dilute value and expand footprint rather than returns. That tells us everything we need to know. When management chooses scale over shareholder value, we step aside.
FTSE 100 Accounting Arbitrage
We were bemused by one of our shorts proudly announcing that it had been making up part of its revenues. It gets better. The company explained that it has discovered a novel form of accounting, and it is so effective that it will continue to use it more. To put this into context, the company incurred a real loss of £100m under the standard accounting rules used by all other companies. Using its own special accounting rules, it made a £400m profit. Management then took home large bonuses and generous share options. Pure genius.
In essence, it is recognising 30% of estimated sales from a 10-year contract in the first year, regardless of the actual sales made to customers for cash during that year. This type of accounting may seem innovative, but it is not entirely new. Enron did the same thing brilliantly. It works as long as the deals continue to flow and the numbers keep rising. But the moment the momentum stalls, everything collapses, exposing just how fragile the whole thing really was.
Since its inception in November 2019, the Kernow strategy is up 52%, compared with the UK equity market, which has increased 38% over the same period. The collective upside in the portfolio is worth more than 240%.
- Book of the month: The Zulu Principle: Making Extraordinary Profits from Ordinary Shares by Jim Slater
- Good month for: Hochschild Mining, +44% as dividends restored
- Bad month for: 4imprint Group, -29% warns of challenging near-term US environment
Merryn Somerset Webb chat
In March, I had an enjoyable conversation with Merryn Somerset Webb on her Merryn Talks Money podcast for Bloomberg. In addition to discussing why the UK market is a stockpicker's paradise, we explored two standout stock ideas and dug into the thinking behind them.
A Tariff Special - What’s Next?
Drawdowns are normal and uncomfortable. Events like Covid or the IT security incident last year are more frightening to me as they are uncontrollable. A tax rise in one country is a controllable situation. All the chess pieces are in full view. They take turns, and it takes time for cooler heads to prevail or for a winner to emerge.
Taking a step back, it’s clear that broad prosperity has declined. In other words, uncertainty is sky-high and is the main concern right now. The path of escalation still needs to be navigated, and the cost of capital is rising dramatically. The critical part of the macro story we are currently focusing on is identifying when we reach ‘peak tariff’.
Our view is this. We don’t think we are going into WW3. Once the direction of tax policies becomes clear, stock markets will regain efficiency, driven by expanding economic activity at whatever the new, admittedly slower GDP growth rate turns out to be. This could happen as soon as this week or may not occur until 2028. Our guess is August, and we update it every day.
The UK stock market is holding up better, benefiting from its competitive advantage over the EU in terms of tariff rates and the high proportion of vertically integrated domestic stocks. Ironically, it is a more attractive place to invest than the US right now. As for tariff winners, we have identified a few so far. On the short side, all companies with weak balance sheets are in play. I suspect we’ll dive into that further next month.
One Differentiated Perspective
Conventional wisdom holds that tariffs are harmful. An overwhelming 98% of economists and commentators agree. Basically, anyone that can read and add up. That level of consensus is rare, which makes it all the more interesting to ask: what if they’re wrong? Even slightly. What if tariffs end up working not just economically but psychologically? Suppose they catalyse a renewed sense of national pride, reinvigorate domestic productivity, and strengthen internal resilience, all at a cost smaller than anticipated losses from trade friction or reduced competition.
That’s not a prediction of what will happen, but it's worth entertaining as a tail-risk scenario with perhaps a 20% probability. History has taught us to be cautious of certainty. Y2K was a non-event, and the Covid recovery was far swifter than the models forecasted. Paradigms do shift. With sentiment this one-sided, if things come in even modestly better than feared, the market could be caught offside and the resulting moves in select equities could be substantial.
Some Comfort (Not Investment Advice)
We are receiving several thoughtful questions from investors, which is understandable given the current backdrop. Whenever asked what one should do in moments like this, our answer remains consistent: stick to your investment strategy. Avoid reactive decisions or speculative moves. Your capital should serve your goals and be purposeful and empowering. Don't put life on hold waiting for political noise to settle or in pursuit of perfect timing. The right time to live your life is now.
At a push, in terms of portfolio construction, focus first on safety, then on return. Ensure holdings are genuinely diversified, not just in form but in substance. A portfolio should be distinct and reflective of the edges targeted. Allocate to strategies with uniqueness and conviction rather than following the crowd. Diversify enough to be still relevant, never so much as to dominate. For instance, Kernow might be 5% of your long-term assets but not more than 20%.
If you’re reassessing your approach in light of recent market stress, now is a good time to pressure-test your thinking. See how your portfolio would have performed across varied historical regimes: the crash of 1929, the boom of the '50s, the stagflation of the '70s, the dot-com bubble, and the 2003–07 rally. Get comfortable with the market breathing. This helped me focus on the long term and forget the noise - tariffs, tweets, whatever the headline is today. Things are never as bad or good as they seem. There is always something trivial to worry about. The best investors I know say don’t let it get in the way of the long term. Focus on sharpening that edge not guessing tomorrow.
Given Kernow’s philosophy, that means the real risk is waiting around for certainty. By the time it feels safe, the real opportunity is gone. The big winners are the ones who step in when it’s uncomfortable - who buy when others are too afraid. It’s hard to argue that’s not now.
All the best
Alyx Wood
Chief Investment Officer
Kernow Asset Management
