I am relatively happy with the performance of my investments, but I’ve decided to take a little bit out of the Newton Asian Income fund, which I put the bulk of my 2012 ISA into.
It has been a difficult time for the Asian market of late, and although Jason Pidcock’s fund has been a strong performer in its own right with returns of over 15 per cent since April last year, I’m a little worried about the sentiment surrounding China’s credit issues.
I still believe in the long-term Asian income story and rate Newton Asian Income as the leader in its field, but I’m looking to diversify my risk a little.
Saving for a house deposit remains my number-one priority, and although my time horizon for this isn’t extreme – somewhere between five and 10 years – equities are my preferred method of investing.
I see little point in holding bonds at the moment given where yields are, and I’m actually quite optimistic about the outlook for risk assets in light of the Fed’s recent announcement regarding quantitative easing.
I’m regionally diversified across my ISA as it is, and given that I’m not hugely bullish about any one particular region, I want a globally focused fund. I’ve got a couple of lively trusts such as the Aberdeen New Thai IT and so I don’t want anything too racy, but predominantly invested in developed markets.
I’ve decided to go for one that doesn’t seem to be on many investors’ radars, given that most industry professionals I spoke to knew very little about it. This doesn’t particularly bother me – I quite like the idea of boasting about a hidden gem that no one’s ever heard of. Famous last words, perhaps...
The £191m Ruffer Equity & General fund has been headed up by FE Alpha Manager Alex Grispos since December 2007. It sits in the IMA Flexible Investment sector, investing predominantly in developed global equities. It can hold up to 100 per cent in equities at any given time.
What has attracted me to this fund is Grispos’ strict investment process. The manager is a value investor, looking to buy out-of-favour stocks that he believes are undervalued.
"When analysing a company, the manager will focus on its business model and attempt to answer two simple questions: can the stock price go lower? And what could be the potential loss?" explained the FE Research team.
"This results in a portfolio of global stocks that the manager feels have excellent growth potential. His largest holdings are in companies with a price that he is confident cannot get any lower."
The FE Research team explains that Grispos does most of his big trades following market falls – such as the one we’ve seen in the last month or so – where companies tend to fall in unison, regardless of their quality.
This is all pretty straightforward stuff so far and is fairly typical of a lot of special situations and recovery funds. What I like about Ruffer Equity & General is how Grispos manages his cash weighting.
"He is not afraid to use rising markets to build up a cash reserve that can be used when the economic environment worsens," the FE Research team continued.
"This results in a fund that tends to beat its peers and benchmark when stock markets decline but falls behind when they rally."
Grispos’ willingness to allow cash to build up in his portfolio has two big positives in my opinion. First, it ensures that the portfolio is insulated from a steep market fall following a sustained upswing in markets, and also gives the manager flexibility to cash in on cheap, quality stocks when the fall does occur.
According to Ruffer’s latest factsheet, which was updated at the end of May, the Equity & General fund had 31 per cent in cash, which the manager said was a result of expensive prices across the board.
"Economic activity is improving but the irony is that it is most difficult to find new ideas at current prices," Grispos wrote in a note to investors. "Few sectors in the market are undervalued and/or out of favour."
It will be interesting to see what level it will be at at the end of this month, given that markets fell significantly in early and mid-June. For this reason, buying the fund now seems like a particularly good idea, as the manager has just been given an opportune time to snap up some bargains.
This way of investing has been successful for Grispos since he started running the fund in March 2008.
Performance of fund vs sector and index since Mar 2008
Source: FE Analytics
According to FE data, the fund has returned 64.26 per cent since Grispos took over, significantly outperforming its sector average, which is up 17.82 per cent. CF Ruffer Equity & General is number-one in the sector over this period by some 20 percentage points.
The fund has also been far less volatile, boasting an annualised score of 8.76 per cent over five years, compared with a figure of 14.52 per cent from the sector.
The fund is completely unconstrained and does not have a benchmark, but uses the FTSE All Share as a means of comparison. It has also beaten that since Grispos took over, and with less volatility.
As the graph above shows, the fund protected much better against the downside during the 2008 crisis than its peers, but this was also the case in the summer of 2011 and in the recent correction.
Grispos has also managed to deliver competitive returns during rising markets, thanks to buying cheap stocks at these points.
Over one and three years, the fund is behind the FTSE All Share, but has beaten the IMA Flexible Investment sector average.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
This strong performance has seen Grispos earn FE Alpha Manager status, and the fund four FE Crowns.
Grispos’ use of cash is presumably why the fund sits in the IMA Flexible Investment sector rather than the IMA Global sector, which would require it to have at least 80 per cent in equities. The Flexible Investment sector allows the fund to have up to 100 per cent in cash, although this is very unlikely, of course.
The manager’s equity content is invested almost entirely in developed markets, with just 2 per cent in emerging Asia. The US is by far the fund’s biggest regional position at 34 per cent. The UK is second with 17 per cent, followed by Europe with 11 per cent and Japan with 5 per cent.
The portfolio is highly diversified, with almost 100 holdings, the majority of which are large caps. Among the largest positions in the top-10 are JPM Chase & Co, Johnson & Johnson, Google, Tesco and the Fidelity China Special Situations IT.
CF Ruffer Equity & General requires a minimum investment of £1,000, and has an ongoing charges figure (OCF) of 1.56 per cent. It is available across a number of platforms.
The FE Research team says the fund’s "abnormal return profile" makes the CF Ruffer Equity & General fund "a good candidate for inclusion in a diversified portfolio". I’d have to agree with them, but it would be interesting to see what you think.
