Steve Russell, co-manager of the £1.7 bn ($2.7 bn) Ruffer Total Return Fund, is betting on a US-led recovery in Japan. He is free to invest across different asset classes in the pursuit of preserving capital in all markets, and generating a return well ahead of cash, so it is all the more striking that his biggest equity bet is on Japan.
Russell and his colleagues believe Japan is likely to benefit disproportionately from a US recovery. This comparatively bullish view is striking because it contrasts with the firm’s willingness to consider seriously threats on the economic landscape: Jonathan Ruffer, the fund management firm’s founder, was one of those who foretold the credit crisis. An investor who put £1 into one of the Total Return Fund’s accumulation shares at the launch in September 2000 would now have £3.23, comfortably beating the FTSE All-Share or gilts indices.
Some would say that if Japan bounces because of a US recovery, this is an ideal time to be a Japanese IRO: first, their businesses enjoy better management; second, many of their shares change hands at bargain prices.
As for fund managers, there is plenty to play for: Japan’s corporate sector holds record amounts of cash. Non-financial companies had more money in currency and deposits at the end of September than at any time since quarterly data began in 1979, according to the Bank of Japan.
What do you want Japanese companies to do with the cash? Ideally, they’d pay out the cash in dividends. There has been too much capex in the past. And I don’t want M&A. The problem with Japanese companies and M&A is that the only real opportunities are overseas, and they have a history of overpaying.
How is corporate Japan changing its relations with investors? We’ve seen an increase in shareholder friendliness. Businesses such as Pioneer and Sony, the consumer electronics companies, have closed or sold loss-making – or insufficiently profitable – businesses. That is perhaps the most significant sign of a change in corporate Japan: in the past, strong export markets protected groups from facing realities. Executives are showing a real seriousness in how they deal with serial underperformers and address business structures.
Other signs corporate Japan is courting investors include the arrival of Japanese executives in London, showing a greater willingness to meet shareholders. There is also a more open attitude to non-domestic investment banks. Part of that comes from Nomura’s decision to buy Lehman Brothers’ European and Asian investment banking businesses in 2008. Given Nomura’s size in the Japanese investment banking sector, that has knock-on effects: there’s a greater internationalism coming in.
Your biggest equities bet is on Japan. Why? We think it likely that the Bank of Japan and the government will continue the stimulatory package of the fourth quarter. This was the sole major market not to do something similar in 2009 and earlier in 2010. The package will benefit the market generally, and the financial sector in particular. The Bank of Japan spent Y14.2 bn ($172 mn) on exchange-traded funds on December 15 and another Y2.2 bn on real estate investment trusts on December 16, for the first time in its history. Although these numbers are small, we believe the bank is clear about encouraging investors to take risks. Its actions in buying such risk assets are unprecedented.
Why else are executives and investors likely to have a meeting of minds? Japanese equities change hands at very cheap valuations, historically and in comparison with international markets. Japan’s companies are likely to report unexpectedly good earnings, because a potential US recovery may lead to a Japanese revival. Then investors could change the way they think, from deflation to inflation. Finally, international investors are massively underweight in Japanese equities.
Investors are likely to remember ministers and central bankers who failed to revive Japan. Why should government action make a difference now? We sense a growing realism among the political class to tackle a very large deficit and lackluster growth. A lack of growth has had a big impact on the tax take. There is a thawing in the attitude in Japan. So after two lost decades for some Japanese investors, do you scent an opportunity? Yes, but it’s never without risks. It’s not guaranteed the authorities will push through with the policies.
Fund snapshot Name: Ruffer Total Return Fund Size: £1.68 bn Number of holdings: 89 equities, 11 bonds Five largest equity holdings: Vodafone, T&D Holdings, Ericsson, BT Group, BP Details correct as at January 31, 2011