Technology, and biotechnology in particular, was one of the leading sectors last year and into the beginning of 2014 before suffering serious falls over the past month.
Performance of indices in 2014
Source: FE Analytics
Russell (pictured) and Baillie suggest that March’s bearishness was thanks to a growing expectation that the Federal Reserve will end QE and hike rates sooner than previously thought.
“US economic numbers were stuck in limbo as commentators remained undecided as to whether indications of slowing economic growth at the start of the year were snow-induced or the beginning of something more sinister,” they said.
“Time will tell but recent hawkish comments from the Federal Reserve would suggest the former scenario is more likely. However, that is not necessarily the end of it.”
“Comments from Yellen, Stein and Fisher at the Fed suggest that there is a growing consensus amongst policy makers in the US that ultra-loose monetary policy cannot be allowed to continue to increase the level of risk taking and push up asset prices indefinitely.”
“Yellen quantified the amount of time between QE ending and interest rates rising as being ‘about six months’ – surprisingly precise for a Fed spokesperson.”
“Jeremy Stein’s commentary on financial stability last year gave impetus to the notion of tapering quantitative easing and so a similar withdrawal of monetary support from here may follow. Since the month end he has announced his retirement from the Fed to return to academia.”
“In short, the message is that taking some steam out of frothy markets and inducing an equity market setback is a price worth paying to avoid a bigger problem further down the road.”
“This might dent confidence but at some stage bubbles have to be pricked, and everyone knows that gently deflating a bubble is easier said than done.”
“The initial effects of this change in rhetoric can be seen in markets; ‘hope’ stocks such as the biotech sector and young tech companies have seen a marked increase in volatility.”
The managers say they have marginally reduced their equity exposure to protect from the effects of this skittishness.
UK equity exposure has come down from 14 per cent to 13 per cent, US equities from 13 to 12 per cent and European equities from 4 to 3 per cent.
The gold and gold equities bucket has slightly ticked down to 5 per cent from 6 per cent and cash is up to 8 per cent from 5.
The managers say that the volatility in the markets justify their decision to maintain their defensive derivate positions even if they haven’t made them money yet.
“Much of our option protection needs a bigger move than we have seen in the last month to start to earn its keep, but it should perform well if we see a sharp fall in markets and an increase in volatility,” they said.
“It is impossible to time these things and as ever our preference is to have defensive positions in place ahead of time.”
The position in Japanese equities has been maintained at 14 per cent, however, and the managers say they remain extremely optimistic for this market, in contrast to a number of sceptical commentators.
The Japanese market is down 7.31 per cent in 2014, but Russell and Baillie say there are economic signs these fortunes could soon change.
Performance of index in 2014
Source: FE Analytics
“We mentioned earlier in the year the importance of the annual wage negotiations in Japan,” they said.
“This is a key part of Prime Minister Abe’s financial reform agenda. These negotiations are now broadly complete and we have seen the first wage growth in Japan for 15 years.”
“Total pay is up 2-3 per cent on average, (positive in real terms), and the all-important rise in base salaries has also been achieved.”
“The naysayers will claim that the rise was too small to have a material impact on consumer psychology and change their propensity to save rather than spend.”
“However, this is the first part of a long term change of direction, and the effects of real wage growth when workers have seen their salaries decline for so long should not be underestimated.”
“Companies were never going to give away too many goodies in one go, as they will want to see the reward of lower corporation tax rates and employment reform before they can raise wages further.”
“On the other hand, dividends have hit record levels in absolute terms in Japan (an average yield of 1.8 per cent across all listed companies).”
“This shows that companies are feeling more confident and shareholders are seeing the benefits of last year’s stellar corporate results, (profits up by 54 per cent across listed companies).”
“There were also some fascinating insights into the pact between Abe and the corporate sector in the shunto [wage negotiation] results.”
“Toshiba’s announcement of salary increases was accompanied by the statement ‘With this agreement we aim to contribute to the creation of the virtuous economic circle advocated by the Japanese government’. This sort of unity greatly increases the chances of success for Abenomics.”
The £255m Ruffer Investment Company targets positive returns each year of at least twice the Bank of England base rate and prioritises preservation of capital to achieve this.
Over the last year it has lost 4.68 per cent, however, as cyclical assets have rallied. However, over the course of the whole last cycle it has massively outperformed both UK equities and the average global investment trust.
Performance of trust vs sector and index over 7yrs
Source: FE Analytics
It has an annual management charge of 1 per cent.
