Ruffer Investment Company 16 January 2019
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 is designed to deliver steady all-weather returns across the cycle, aiming to protect capital in falling markets and deliver double the Bank of England base rate on a 12-month rolling basis. Primarily a long-only vehicle, the trust also uses currencies, derivatives and illiquid strategies as part of its highly differentiated investment process and is managed on a day-to-day basis by Steve Russell, Hamish Baillie and Duncan MacInnes.
The managers have believed for a long time that efforts to reflate the economy will result in too much inflation, which central banks will find hard to control, and the portfolio is designed to perform well in an inflationary environment, with significant exposure to UK and US index-linked treasuries. In the meantime, however, the managers are keen to ensure that investors are paid to wait; using equities – a mix of special situations, macro opportunities and value plays – to enhance performance.
2018 was a tough year for Ruffer, which lost 5.6% - more than it has lost in any calendar year since inception, and the trust’s performance as a result of recent declines now looks weak over one, three and five years. The trust has traded at a consistent premium since the referendum and its discount at the time of writing reflects this unusually poor showing – at nearly 5% this too stands at a level which hasn’t been seen since 2007.
The trust’s equity exposure – largely made up of cyclical and value stocks, a sharp fall in the oil price, and significant sterling exposure held in the view that more or less any positive news out of the Brexit fiasco would be better than the market’s expectations, all weighed on returns.
A difficult time recently, then, for shareholders in the trust. Yet closer examination of the trust’s NAV over the last twelve months shows that, as the sell-off has intensified, the portion of this trust’s assets which really differentiate it from its peers – and offer the greatest defensive qualities – came into their own. The trust’s protective assets, particularly its illiquid strategies, performed well; the Ruffer Illiquid Strategies Fund 2015, for example, appreciated by 30% over the last quarter of 2018.
It is worth noting that these defensive assets were put it in place to protect its shareholders against real, consequential, falls in the market - not to shield them from every bump in the road. Ruffer has seen difficult periods before, notably in 2006 when the trust struggled to keep its head above water as the initial cracks appeared before the financial crisis. With that in mind, while concerns about the health of the global economy continue to escalate, the managers believe there is comfort to be taken from the clear impact that these protective assets had on performance in Q4 when markets really began to tumble.
Ruffer has a long history of protecting capital during downturns, most dramatically during the 2008 financial crisis when it generated positive returns of 25% while the market lost 30%. Between downturns, the trust has generated consistent annualised returns in excess of 7% per annum since it was launched.
Last year saw the trust lost around 5% - more than it has lost in any year since inception. That this is remarkable is in our view testament to the manager's reliability with which they have navigated the turbulent sixteen years since the trust was launched. Far from heralding the end for this tried and tested strategy, the longer term track record would indicate that this will perhaps be a mere bump in the road.
We note that as the sell-off intensified in Q4 2018, the trust's capital protection assets began to deliver. The Ruffer Illiquid Strategies Fund 2015, for example, appreciated by 30% over the last three months. We are also encouraged that the trust's equity portfolio, largely made up of economically sensitive value stocks, is in a good position to potentially rally should markets bounce from here, while the protective assets will generate further returns if markets fall further. We think this is an enviable position, and remain confident that Ruffer is a solid choice for those seeking a wealth preservation vehicle for their portfolio which is capable of delivering inflation plus returns over the longer term.
|Having endured a difficult year, the portfolio is in a position where it could benefit regardless of which way the market moves next
|The idea that QE will eventually stoke inflation is a key part of the managers' philosophy but inflation has, thus far, remained remarkably reluctant to rear its head
|Should a significant correction occur, the trust's capital protection assets are likely to generate a significant boost for returns
|The emphasis on preserving capital trust can feel a little leaden to investors when equities markets are buoyant
|The trust is highly differentiated versus the competition, with few similar offerings on the market and even fewer with this track record