Fund of the week: a punt on inflation and Japan

Like other cautious managed funds, the CF Ruffer Total Return Fund aims not to lose money. However, "unofficially, the aim is to make 10% a year", says the fund's co-manager Steve Russell. So far, that is no idle brag. Up 58% since 2004, the fund has returned 18% since July 2008 against a 16% drop for the FTSE All-Share.

A graduate in PPE from Oxford, Russell and his fellow manager David Ballance are self-confessed inflationists. They have a large exposure to index-linked government bonds in the UK, US and Japan. Another 7% of the fund is in gold: half in major miners such as Barrick Gold and Newcrest Mining and the other half in gold exchange-traded funds. "Governments are printing money to such a degree that there is a real risk of a loss of faith in paper money," he says.

Equities make up a major share of the portfolio. But fearing a long recession, "and quite possibly a W-shaped one", he is avoiding cyclicals. Instead, UK blue-chips and Japanese stocks make up the majority of the fund's equities.

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Defensives such as BP and BT have lagged in the recent rally, so should do well in the third quarter, he believes. "But the biggest attraction is that they have a safe and steady yield of 6-7%." Cyclicals, in contrast, pay practically no dividend.

Aside from the UK, Japan is favoured for its strong balance sheets; "Japanese banks look better (than Western ones) on a risk-reward basis", he says. But the biggest draws are certain real estate investment trusts, such as Nippon Building Fund. "As Japanese banks normalise lending criteria, there is a big upside available on yields of 4-5%".

Telephone: 020-7963 8215.

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CF Ruffer Total Return's top ten holdings