Ruffer has almost half the equity exposure of its flagship investment trust in Japan on the expectation of a substantial rally in Japanese financial stocks.
Johnathan Ruffer and Steve Russell, who run the £178m Ruffer Investment Company, have 22% of overall assets in Japan – their largest single allocation.
Apart from a further 31% in equities, the trust also includes 32% in British and overseas index-linked debt and 5% each in cash and gold.
“After a good period [for Japan] at the beginning of 2010, the performance has given way to a sideways-to-down trend,” says Ruffer. “More than 40% of our equity exposure is now held there and the moral is that we had better be right.”
The managers started buying high-beta Japanese financials in June, pointing to Japan as a rare opportunity in a “distinctly boggy” investment world. Purchases included T&D, a life assurance stock, Daiwa, a broker, and Mizuho, a bank that recently raised money to strengthen its tier-one capital.
T&D and NTT Data Corporation are both in the trust’s top five holdings, alongside a 2.7% stake in the group’s open-ended Japan fund, managed by Kentaro Nishida.
“We are confident a decision by the Bank of Japan to introduce a policy of easing is not far away,” says Ruffer. “There is such a strong culture against currency compromise, and this, combined with natural conservatism, has meant that, short of a deflationary crisis, easing will not happen. [But] this is precisely what we think [Japan] is headed for.” (article continues below)
According to Ruffer, this should result in a weakening currency – with the trust’s exposure hedged – a steepening yield curve benefiting life assurance companies and a sharply rising market.
Elsewhere, Ruffer says the bounce in markets in July did nothing for the portfolio, as its defensive positions failed to hold their ground. The trust also suffered from its index-linked positions, with a sell-off in these assets for two unconnected reasons.
“The first is deflationary forces in the world have become more apparent in the last few weeks,” says the manager. “This is no reason to sell index-linked since it is the onset of deflationary problems that encourages central authorities to continue quantitative easing, which brings about inflation.
“More to the point has been the adoption by authorities of a CPI [Consumer Price Index] measure for inflation adjustment, rather than RPI [Retail Price Index].”
If there is a unilateral substitution of the CPI, which tends to be at a lower level, for RPI, says Ruffer, it would probably knock about 5% off the value of a 10-year index-linked gilt, which has already fallen about 2.5% in recent months.
“The other danger is that new CPI index-linked bonds will fit CPI liabilities better than old RPI bonds,” he says. “This could see the old-style bonds trading at a discount to true value to reflect this factor.”