Ruffer Investment Company 06 March 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Ruffer Investment Company. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Ruffer Investment Company (RICA) is intended to deliver positive returns in all market environments, most importantly protecting against loss of capital when equities and bonds are losing money. Over the long run, the trust has a good track record of achieving this (see Performance). However, following an outstanding 2022 for the trust, during which it made positive returns as equity and bond markets fell, 2023 was a disappointing year as a number of positions didn’t work as expected.
The strategy is to use a broad variety of assets to build a portfolio with multiple drivers of returns which should do well in different scenarios. This means adjusting asset allocation based on what the management team at Ruffer view as the main risks. Currently, the team believe we are entering into a new regime for financial markets in which high and volatile inflation is the core risk to capital. This drives a large position in inflation-linked bonds, as well as a position in gold, industrial commodities and their producers. Last year these positions didn’t pay off, as we discuss in the Portfolio section, but managers Duncan MacInnes and Jasmine Yeo argue that this is largely because markets have become complacent about the outlook for interest rates and inflation, with serious risks of losses in equity and bond markets remaining.
The success of the trust over the years has seen RICA trade on a premium for long periods. However, in 2023, as the market has become less concerned about inflation, a Discount has opened up in the shares and the board has initiated buy-backs.
Duncan and Jasmine are clearly disappointed with how 2023 worked out. In a period of high inflation, RICA lost money, and many investors who thought of the trust as an inflation hedge will have been wondering why. One reason is that while current inflation was high, long-term inflation expectations remained fairly anchored, as markets came increasingly to the view that the recent inflation was likely to subside quickly and recession maybe avoided. RICA had positions in long-dated index-linkers, and as a result did not benefit. Meanwhile gold and commodities all performed as if inflation was likely to subside too, and the protection strategies cost money as bond and equity markets performed.
However, we would make two points to put this year in context. First, equities and bonds both made good returns. It is disappointing that RICA wasn’t at least flat, as it has been in other good years for risk assets, but we don’t think this is the environment that the trust is typically most helpful in. Secondly, it was 2022 in which we saw the real inflation surge and RICA did indeed perform very well, while its peers following similar strategies lost money alongside equity and bond markets. Overall, RICA has performed in line with equity markets over the past two years but generated positive performance in much of the period when equities were losing money. In our view this is creditable and speaks to the benefit of holding RICA in a portfolio.
RICA remains a valuable hedge against central banks not being able to engineer a ‘soft landing’. We think Duncan and Jasmine are right in their view that markets are now pricing in an incredible escape from the inflationary environment of the past few years. As a result, a typical equity and bond portfolio could be dangerously exposed if this outcome doesn’t emerge, and RICA could provide valuable protection once more.
Bull
- Strong track record of making good returns while limiting drawdowns, especially in crises
- Well-positioned for an inflationary environment, in contrast to many other strategies
- Current discount may offer a rare opportunity
Bear
- Long-term and contrarian approach can lead to periods of sluggish performance
- Could suffer if central economic theses are proven wrong – i.e. inflation falls, remains low and stable and/or real rates stay positive
- Positions can be complex and hard for investors to understand