Meet the fund manager: Alex Grispos of Ruffer

Ruffer doesn’t do market benchmarks. Rather than target relative performance, the firm aims to never lose money, while gradually building up returns through a mix of different investment styles. The approach has proved popular, with assets under management now at roughly $24 bn.

‘Our equity holdings are all (we think) interesting ideas, irrespective of the index weighting’ – Alex Grispos

Alex Grispos, investment director and manager of the CF Ruffer Equity and General Fund, joined the company in 2005. He began his career in equity research, before spending six years in venture capital. Given Ruffer’s disapproval of index tracking, Grispos is free to invest across the world in companies both big and small.

You have assets under management of approximately $24 bn – what percentage is in equities, and what percentage is in US equities?
Approximately 40 percent-50 percent is in equities and around 10 percent of that is 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 Hong Kong office involves our research team in Asia (ex-Japan). In 2009 we opened an office in Edinburgh from where we serve our local clients.

How do you describe your investment style?
At Ruffer we try not to lose money but gradually make it instead. At the same time, we nurture different investment styles; we are not all the same here. We are a 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 rather than just stocks, hence we wish to know a lot about these businesses. We are opportunistic and our team scans the world for securities that are mispriced. We are often 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 component. We read a lot and 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 management.

What’s your average holding period?
It depends on valuation. We sell if a stock is no longer characterized 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 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 allow the compounding effect to work for us. There have been many times when we sold quickly, taking profits too soon.

What’s your average market cap for US holdings?
Quoting an average could risk misrepresenting ourselves. Our larger holdings obviously involve companies of higher market capitalization and this is a function of assets under management, but this does not mean we don’t invest in small companies. As I said before, at Ruffer we try ‘not to lose but gradually make’ and this means we can invest in a stock of any size where the risk-reward balance 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.

What’s your average holding size? Do you have a cut-off in terms of market cap?
Our larger positions could be around $500 mn but we have many smaller positions depending on the risk profile and size of the business. We don’t have a cut-off for market cap.

What are your performance statistics?
The representative Ruffer client portfolio has generated a compound annual return of 10.8 percent (after fees) since 1995. Over shorter periods, returns are similar: 12.3 percent over one year, 8.4 percent a year over three years and 11.3 percent a year over five 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 done better than equity returns (such as those from the 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.

Can you own Canadian stocks?
Yes, of course: at the beginning of last year we bought Thomson Reuters. We also own some Canadian Natural Resources and recently took a position in Imperial Oil. We invest anywhere around the world where we understand the business and we feel the risk-reward is attractive.

What are your favorite and least favorite sectors?
Historically, we have allocated capital in sectors that were unpopular at the time. For example, in late 2010/early 2011 we bought pharmaceuticals (Merck, Novartis) and in late 2011 we had the opportunity to buy US banks such as JPMorgan, US Bancorp and M&T Bank – its fundamentals were improving while its share price was falling due to the euro crisis. At 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 2006/2007 we have been interested in staples, income-generating stocks such as Kraft and Johnson & Johnson, while this year we have been selling them when they become more popular.

The bottom line is that our favorite and least favorite sectors have changed radically over time. We invest opportunistically depending on the price and quality of the business.

Do you have a buy trigger? Does a stock have to have 20 percent upside, for example?
We need to have a high margin of safety, so the odds of losing money over time should be low. We also tend to look into stocks that are not market favorites, so in practice our estimate of the business value tends to be significantly higher than the current price before we invest.

Does a stock have to be profitable?
Yes it does. We very rarely invest in non-profitable businesses. We like to see the cash flow; 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. But sometimes when a stock is out of favor and it is characterized by high growth, we may invest even if the valuation seems high. A typical case was Google at the beginning of 2012, which we bought at a bargain price a few months before Facebook’s IPO.

Can you discuss why you bought your largest shareholdings?
This year we bought Microsoft and IBM. In general, technology stocks are undervalued, and Microsoft has been a cash machine and out of favor for many years, but recently we felt the valuation was 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 was offered at a really low price.

We like companies that have solid capital allocation. IBM has produced solid results during the financial crisis and was buying back its shares during the dark years of 2008-2009 when most corporates stopped doing buybacks. Similarly, early this year we enhanced our position in Viacom, another business that produces tons of cash and allocates it efficiently. And since 2009 we have been with Texas Instruments, a cyclical business that has been transforming itself while buying back its stock.

We have been with Walmart since 2010 when the company was out of favor; during 2011-2012 it restructured. Although we have now somewhat reduced our position because the price has moved higher, we still think it is attractively priced. It is a low-cost producer and we believe it will do well when inflation moves higher in the US. Walmart has also been a solid and consistent capital allocator.

Lockheed Martin and General Dynamics were bought early in 2013. The defense sector has been out of favor due to sequestration and budget cuts. Lockheed is more representative of the sector: a high-quality franchise that was offered at a very low price. General Dynamics, though, is more of a special situation: the value of Gulfstream, a growth business, was not reflected in General Dynamics’ price. This is a restructuring case with new management likely to make a difference.

Any recent sales? Why did you sell?
We have been reducing our exposure to staples companies: although we have been keen on these since 2006, most recently their prices have materially increased and valuations do not provide a high-enough margin of safety – hence we have been trimming our positions.

Do you vote your proxy?
Yes, we often do. Our style is to be supportive of the management teams of the stocks we own.

In terms of the IRO, CEO, CFO, and so on, who do you prefer to meet?
IROs 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 were to buy part of a business we also like to meet the management. We would like to meet the chief executive, CFO and other operating members of management.

Gill Newton is a partner at Phoenix-IR, an independent investor relations consulting firm.