Ruffer Investment Company (RICA) is designed to achieve positive annual total returns (after expenses) of at least twice the Bank of England base rate. The trust invests internationally across a range of asset classes, seeking to hold both growth and protective strategies in an appropriate balance with the aim of generating consistent positive returns and avoiding losses over rolling 12-month periods.
RICA consists of pools of assets designed to provide different return profiles in various environments. This structure has proven robust in the market sell-off in Q1 2020, with NAV returns basically flat (see Performance). The managers have long argued that structural problems in developed economies – primarily too much debt and too little growth – will ultimately compel governments and central banks to ever more extreme measures to try and inject inflation and nominal growth into the system, and have been positioned accordingly. A sharp shock to the economic system from the spread of COVID-19 seems set to catalyse this, and they believe it will be unlikely to prove politically feasible to unwind ‘temporary’ emergency-support measures.
As we discuss in the Portfolio section, the managers have taken profits in protective strategies focussed on equity markets and volatility after a substantial rally in these derivatives. However, they continue to hold protection in credit markets, which should offer asymmetric protective characteristics should the current crisis evolve into a full-blown credit crisis.
With the protective strategies having largely offset losses in the equity holdings, RICA’s NAV has remained resilient. However, the discount has moved slightly wider, but seems to have consistently attracted buyers when around current levels (c. 6% as of 31/03/2020).
RICA has fulfilled its primary objective in the recent, turbulent, weeks. In the ‘Goldilocks’ investment epoch, it may have been tempting to disregard many of the protective strategies as requiring a spike in volatility which the ‘Fed put’ would essentially preclude. However, as seen in both Q4 2018 and Q1 2020, a permanently becalmed state is not a realistic expectation for asset markets. We had previously highlighted that these protective strategies with asymmetric pay-off structures would likely ultimately prove highly attractive, and thus it has proven. The managers’ trading activity around these in recent weeks seems sensible, booking profits from assets unlikely to offer much further appreciation whilst retaining assets which retain substantial upside if the current pandemic and associated economic shutdown develops into a wider systematic credit event.
Having protected on the downside, the managers have also identified attractive potential convexity in inflation-linked bonds. The short-term direction of inflation appears uncertain, with a tsunami of government borrowing meeting a likely chasmic dearth of private spending, but, should these ‘temporary’ government programs prove hard to reverse, governments will be directly injecting money into the economy. RICA’s portfolio remains well-balanced; the discount does not seem to offer the prospect of a substantial uplift, but in our view is unlikely to widen substantially. Overall RICA should continue to offer resilience as part of a balanced portfolio, with the potential for substantial upside if the managers’ base case macro scenario materialises.
|Has offered protection in recent sell-off, and should continue to do so in future||Will likely lag equity products if we see a sharp market recovery|
|Should offer substantial upside if inflation picks up materially||Deflation remains a risk to absolute returns|
|Hedges are well balanced to growth opportunities||Dividend yield is likely to be low|