The manager of the Ruffer Investment Company and the CF Ruffer Total Return fund takes a long-term approach to investing, but still has a keen eye on downside risk, pointing out that funds have to work much harder to recover losses.
To help illustrate the point, funds that lost 50 per cent in 2008 would have had to have made 100 per cent in 2009 to break even.
Russell (pictured) says he prefers to invest in cheap developed market stocks which he says have a similar growth potential to emerging markets with significantly lower downside risk.
“We are looking, but emerging markets are still at a price that you could lose money, and lose money quickly,” he explained. “We don’t want to be in something that has either of these traits – particularly the latter. If you invest in something like Shell and BP, if you do get it wrong the speed of losing money is much, much slower. If I’m wrong on Shell, I can get rid of it before I lose everything.”
Russell has just 5 per cent of his Ruffer Investment Company in emerging Asia, with nothing in South America or any other emerging market. Japan and the UK are his preferred markets, with a weighting of 14 and 13 per cent, respectively.
Unlike some industry commentators, the manager doesn’t anticipate a full scale crash, but does think there is the potential for further losses following a disappointing two years or so for the asset class.
“There are risks in China at the moment, and I don’t think that the western markets are pricing this in,” he said.
“That said, I don’t think there will be an emerging market crisis on the scale of the late 1990s. Certain economies are disadvantaged by the end of QE in the US and they are likely to stay under pressure while this plays out.”
“However, the external deficits in these countries are much better than they were in the late 1990s, and economies are generally in much better shape. I don’t think there will be a full scale crash, but given our cautious bias they are not in good enough shape for us to invest.”
If, like Russell, you prefer to access cheap developed market companies rather than those domiciled in emerging markets, these two deep-value funds may be of interest for your ISA or SIPP.
R&M UK Equity Long Term Recovery
Jason Broomer, head of investment at Square Mile, likes deep value funds and questions why other managers don’t adopt the approach.
“It’s very much the Warren Buffett mode of investing, looking at out-of-favour stocks with a wide margin of safety,” he said.
“I don’t understand why it’s not used by more people. It’s a simple strategy that tends to work very well over the long-term.”
“It requires a lot of conviction, as the strategy can be out of favour for some time. You need to look past the emotional response to bad news and focus on the company.”
Broomer says Hugh Sergeant, who runs the £180m R&M UK Equity Long Term Recovery fund, boasts the attributes above.
“He has been rewarded with a very good record, particularly recently,” he added.
R&M UK Equity Long Term Recovery had a difficult period in 2011, but strong performance recently has ensured its well ahead of its sector and benchmark since its launch in July 2008.
Performance of fund, sector and index since launch
Source: FE Analytics
Sergeant is certainly not resting on his laurels however, including companies that have had a poor period of late such as Bwin, Royal Bank of Scotland and Rio Tinto in his top-10.
Broomer also highlights Ben Whitmore’s Jupiter UK Special Situations fund, Henry Dixon’s GLG UK Income fund and George Godber’s CF Miton UK Value Opportunities fund as strong contenders. All have had a good period of late, but Sergeant’s portfolio has been the standout performer over the past 12 months.
Performance of funds vs index over 1yr
Source: FE Analytics
Broomer adds that buying a deep value fund shortly after a severe market correction is a good strategy, as this tends to unearth a number of bargains in the stock market.
Square Mile is an investment consultancy and fund ratings company, launched by OBSR founders Richard Romer-Lee and Nigel Whittingham. FE recently took a minority stake in the business.
JOHCM UK Dynamic
Amandine Thierree, analyst on the FE Research team, rates FE Alpha Manager Alex Savvides’ JOHCM UK Dynamic fund as a strong contender in the deep-value space.
“This is a special situations fund, targeting out-of-favour companies that the managers believe will see a reversal in fortune, based on their appreciation of the macro environment or more specific factors that influence individual companies,” she said.
“For example, if there is a change in management for the better, or competition suddenly diminishes.”
“Savvides thinks the reason why many companies are overlooked is because of short-term performance. He therefore targets those that have identified their problems and have a strategy to tackle them.”
“Savvides and [co-managers] Mark Costar are established managers with a good record of stock picking.”
Top-positions in the fund include BP, Shell and Anglo American, as well as smaller companies such as FTSE-250 listed stock Qinetiq Group.
As Thierree points out, the fund has a very strong record on both a relative and absolute basis, achieving top-quartile returns in its IMA UK All Companies sector over one, three and five year periods, as well as since its launch in June 2008.
Performance of fund, sector and index since launch
Source: FE Analytics
FE data shows that the fund has returned 105.6 per cent since launch, more than doubling the returns of both the sector and the All Share.
Thierree adds that the £136m fund is small enough to take of opportunities in the small and mid cap market, and likes the fact that Savvides prioritises companies with a yield.
“This gives it a good layer of protection,” she said.
JOHCM UK Dynamic is yielding 2.83 per cent.