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Fund Manager Focus - December 2013

Ruffer LLP - London

Ruffer LLP has AUM of ~ $24 billion, a third for private clients, a third for institutions and a third for charity and retail. The firm was founded in 1994 by Jonathan Ruffer, Earl Ferrers and Jane Tufnell who all remain active in the business today. Ruffer's investment approach focuses on absolute returns. The research team selects securities without reference to any index benchmark. Ruffer has offices in London, Edinburgh and Hong Kong.

Alex Grispos joined Ruffer in 2005 and manages the CF Ruffer Equity and General Fund. He started his career at Alpha Trust in Greece in equity research and later worked in venture capital for almost six years. He joined Top Technology Ventures in the UK before becoming an investment manager with RTF where he was based in London and St. Petersburg. He attended Imperial College, London where he graduated with a first class degree in Mechanical Engineering.

You have AUM of ~$24 billion, what percentage is in equities and what percentage in US equities?

Approximately 40-50% is in equities and c.10% in US equities. This varies over time and depends on valuations.

You have offices in Edinburgh and Hong Kong – what do these offices do?

The HK office involves our research team in Asia (ex-Japan). In 2009 we opened our office in Edinburgh where we serve our local clients.

How do you describe your investment style?

At Ruffer we try not to lose money and gradually make. At the same time we nurture different investment styles, we are not all the same here. We are team of different styles with a common goal. There is definitely a strong macro overlay which gives us direction and guides us against losing money. Our equity analysis is intense, fundamental and business-like –we invest in parts of businesses not just stocks, hence we wish to know a lot about them. We are opportunistic and our team scans the world for securities that are mispriced. We often are at our best when stock prices fall, and find it harder when the environment is buoyant.

Which screens do you use?

Screening is part of our process but not the main one. We read a lot, we are quite intuitive but we also screen to enhance our flow of ideas, though our metrics change.

How do you know if you want to meet a company?

The business model and the current valuation will quickly tell us whether we would be interested in doing more work and potentially invest. Before investing we always prefer to meet the management.

Average holding period?

It depends on valuation. We sell if a stock is not characterised anymore by a high margin of safety. This can happen in a short period or could take a long time. For example we have been buying Johnson & Johnson since 2007 and we started selling it in the second quarter of this year when we felt that its business value was not much higher than the share price. Our compound annual total returns were fine for the risk we took. In general we try to be patient and let the compounding effect work for us. There have been many times when we sold quickly taking profits too soon.

Average market cap size of US holdings?

Quoting an average could risk misrepresenting ourselves. Our larger holdings obviously involve companies of higher market capitalisation and this is a function of assets under management but this does not mean that we do not invest in small companies. As said before, at Ruffer we try not to lose and gradually make and this means that we can invest in a stock of any size where the risk reward is asymmetric. Since 2006 we have found 'value' among many large caps in the US, at the same time we love finding mispriced small companies.

Average holding size?

Our larger positions could be c$500 mil. but we have many smaller positions depending on the risk profile and size of the business.

Cut off in terms of market cap? (ie won't invest <$1 billion)

No cut off.

Performance stats?(How have you performed vs. index and peers)

The representative Ruffer client portfolio has generated a compound annual return of 10.8% (after fees) since 1995. Over shorter periods, returns are similar, 12.3% over 1 year, 8.4% pa over 3 years and 11.3% pa over 5 years, which includes the credit crisis –we actually made money in 2008. The relatively low volatility is a direct consequence of trying not to lose money, which forms the bedrock for compounding long term returns. We tend to find buoyant markets harder and hope to hold on during more difficult times. We don't follow any benchmarks but over the long term our approach has derived better than equity returns (e.g. S&P 500) with much lower volatility.

What's your active share?

As mentioned before we do not follow an index.. Our portfolio involves asset allocation and micro analysis - our equity holdings are all (we think) interesting ideas, irrespective of the index weighting.

What about Canadian stocks? Can you own them?

Yes of course. In the beginning of last year we bought Thomson Reuters. We also own some Canadian Natural Resources and recently initiated a position in Imperial Oil. We invest anywhere around the world where we understand the business and the risk reward is attractive.

Favourite sectors? Least favourite sectors?

Historically we allocated capital in sectors that were unpopular at the time. For example, in late 2010/early 2011 we bought the pharmas (Merck, Novartis), in late 2011 we had the opportunity to buy US banks such as JPMorgan, US Bancorp and M&T Bank -their fundamentals were improving while their share price was falling due to the Euro crisis. In the beginning of this year we bought Lockheed Martin and General Dynamics, two very different investment cases but both in a sector that the market happened to dislike and neglect. Since 2006/7 we have been interested in staples, income generating stocks such as Kraft, Johnson & Johnson, while this year we have been selling them when they have become more popular. The bottom line is that our favourite and least favourite sectors have changed radically over time, we invest opportunistically depending on price and quality of the business.

Do you have a buy trigger? Does a stock have to have 20% upside for example?

We need to have a high margin of safety i.e. the odds of losing money over time should be low. We also tend to look into stocks that are not market favourites, hence in practise our estimate of the business value is significantly higher than the current price before we invest.

Does a stock have to be profitable?

Yes, we very rarely invest in non profitable businesses. We like to see the cash flows, we should be able to estimate the earnings power of the business based on its history.

What about companies with very high valuations?

We most often avoid them. However, sometimes when a stock is out of favour and it is characterised by high growth we may invest even if the valuation seems high. A typical case was Google in the beginning of 2012 which we bought at a bargain price a few months before Facebook's IPO.

Largest holdings – discuss why + when you bought them?

This year we bought Microsoft and IBM. In general technology stocks are undervalued. The former has been a cash machine and out of favour for many years, recently we felt that the valuation is too attractive while change is happening. IBM has done better over time but during the last few months in particular as IT spending has been weak (a function of corporate confidence which is likely to revert) the stock has become more controversial and offered at very low price. We like companies with solid capital allocation. IBM has been producing solid results during the financial crisis and has been buying back its shares during the 'dark' years of 2008-09 when most corporates stopped buybacks.
Similarly early this year we enhanced our position in Viacom, another business which produces tonnes of cash and allocates it efficiently.
Since 2009 we have been with Texas Instruments, a cyclical business which has been transforming itself while buying back its stock. We have been with Wal-Mart since 2010 in size, the company was out of favour then and during 2011-12 it restructured. Although we have now somewhat reduced our position as the price has moved higher, we still think it is attractively priced. It is the low cost producer and we believe that it will do well when inflation moves higher in the US. Wal- Mart has also been a solid and consistent capital allocator. Lockheed Martin and General Dynamics were bought early in 2013. The defence sector has been out of favour due to sequestration and budget cuts. The former is more representative of the sector, a high quality franchise which was offered at very low price. General Dynamics is more of a special situation, the value of Gulfstream, a growth business, was not reflected in GD's price. This is a restructuring case with new management likely to make a difference.

Recent sales? And why you sold.

We have been reducing our exposure to 'staple' companies. We have been keen on these since 2006 but most recently their prices have materially increased, valuations do not provide high margin of safety and hence we have been trimming our positions.

Do you vote your proxy?

Yes we often do. Our style is to be supportive of management teams of the stocks we own.

Who do you prefer to meet (eg CEO, CFO, IR)?

IRs are great as a point of contact because they 'open the door' to the culture of the company and help our analysis but if we are to buy part of a business we also like to meet the management. We would like to meet the CEO, CFO and other operating members.

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