Fund Research

Ruffer Investment Company

Last update 16 January 2019

Ruffer Investment Company is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Summary

Investment objective

The Company’s objective is to achieve a positive total annual return, after all expenses, of at least twice the Bank of England Bank Rate.

As at:

15/01/2019

Group/Investment

Ruffer Investment Company

Ticker

RICA

Management Company

Ruffer AIFM Limited

Manager Name

Steve Russell;Hamish Baillie;Duncan MacInnes;

Association of Investment Companies (AIC) Sector

Flexible Investment

12 Mo Yield

0.8%

Dividend Distribution Frequency

Semi-Annually



Latest Market Capitalisation

£386,887,210

Latest Net Gearing (Cum Fair)

-5%

Latest Ongoing Charge Ex Perf Fee %

1.17

Turnover Ratio %

35.4

Shares Outstanding

 180,788,416

(Discount)/ Premium % (Cum Fair)

-3.5

Daily Closing Price

214p

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.

Kepler View

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.

Bull Bear
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

Portfolio

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 twelve-month rolling basis.

A core tenet of the managers’ philosophy is the view that QE and efforts to stoke inflation will eventually result in too much inflation, which central banks will find hard to contain. The portfolio unashamedly reflects this – with more than 40% of the portfolio held in index linked bonds. Among the index-linked bonds, 12.4% of the portfolio is held in long-dated index-linked Gilts which the managers believe would perform very strongly in the event that inflation really kicks in, a scenario demonstrated by the chart below.

SNAPSHOT: THE CASE FOR LONG-LINKERS


Notes: If the real yield changes from -1.7% today to -5.6%, the price of this bond would move from £240 to £1,900 (a c660% increase). A shift of equal magnitude in the opposite direction, to a real yield of +2.4% would result in the price falling to £33 (a c90% fall). This exemplifies how the long-dated index-linked bonds have an asymmetric pay-off, particularly in an environment where higher inflation and low interest rates are likely to play a key role in clearing the real value of debt, currently at unsustainable levels. Source: Ruffer, Bloomberg, as at December 2018.

Gold makes up 8.8% of the portfolio. The managers switched out of gold bullion, toward which they had a significant exposure, into gold shares in the middle of last year which proved to be a timely move. Appetite for gold shares has picked up strongly and the managers saw one of their holdings – Randgold – rally 40% after the company merged with Barrick.

The trust’s equity exposure – which has fallen overall since we last spoke to the managers – is split largely between the UK (10.5%), Japan (10.4%) and North America (9.3%), with small weights also in Europe (2.9%) and Asia (1.5%). As we discussed in our previous note, Ruffer does not exist solely to act as a ‘doomsday’ fund which only performs well during market crises – it must also deliver returns between these periods. It was in pursuit of these returns that the managers last year favoured cyclical value stocks, often financials, many of them troubled businesses with correspondingly cheap valuations. They chose this route in light of what appeared to be a late cycle boom in the economy, which would have benefited the earnings of cyclical companies, and accompanied by higher interest rates should’ve been good news for financials. Their view on the economy, and interest rates, was proved correct – but investors aversion to risk saw value stocks savaged, undermining returns from this quarter. We note, however, that this leaves the managers in an enviable position at this point - with any sign of recovery likely to trigger a sharp rebound in these assets, and any further falls likely to stimulate more returns from the capital protection element of the portfolio.

Whilst the trust remains primarily a long-only vehicle, the managers have recently diversified their approach to include a growing exposure to options and illiquid strategies, which now make up 7% of the portfolio. In our previous note on this trust we saw that the trust’s use of VIX options was of significant benefit to the portfolio in February 2018 when the VIX index spiked. The managers have diversified into new instruments as volatility has increased and the VIX index has become more expensive. The derivatives book is now split between interest rate options designed to protect the index linked portfolio from rising nominal yields, and equity put-spreads which have largely replaced VIX options and protect the portfolio in the event of a material fall in markets.

It is important to note that these options are not meant to smooth out bumps in the road - indeed they would not be a cost efficient way to achieve this were this the aim. In the meantime there is a cost of carry to these options, which has a drag effect on performance, but as we saw in the closing stages of 2018 when market falls become severe their positive impact is clear, and the upside from this quarter grows should the market fall further.

The other element of this part of the portfolio is the trust’s exposure to illiquid strategies such as long dated volatility options and credit default swaps; the latter of which are particularly well placed in the event of a sell-off, when the most liquid assets are likely to be first in line for the chop for investors seeking safety.

Asset allocation

Source: Ruffer

Given the trust’s global approach, currency is an important factor. However, the managers' view is that, without a strong conviction the risks are too great to take an active position, given that shareholders' base currency is sterling and their belief that the UK currency will be a ‘lightning rod’ when the Brexit negotiations reach their conclusion. “It is very tempting to have a lot of money outside sterling at the moment,” says Hamish, “but newsflow around Brexit at the moment feels as bad as it could be, so even a slightly less disappointing outcome than expected could see a significant bounce – which would be painful if you were outside of that." That being said, there have been times in the past when the managers have held a strong view on currencies and have held a larger amount outside sterling.

Peer group

Ruffer sits in the AIC Flexible Investment sector which is something of a catch-all, including funds like F&C Managed Portfolio, a fund of investment trusts, and Hansa Trust – which has 30% of its exposure in a single holding (a Brazilian port company). As such, comparison with the broader sector is of limited value. Instead we prefer to look at the trust alongside those which most closely resemble it in purpose; namely RIT Capital Partners and Personal Assets Trust.

All three trusts have highly experienced management teams – and all three have delivered consistent, low volatility returns over the long term. Personal Assets had delivered annualised returns of 6.66% over ten years, while RIT Cap has delivered 8.16%. Ruffer has returned 5.75% in annualised terms over the same period, but has by some margin the lowest maximum drawdown of the three.

Gearing

The trust has the ability to gear but has never done so and, given its remit to protect capital, is unlikely to do so in the future.

Returns

For a trust with an absolute return mandate, last year was a tough one for Ruffer. The managers are very aware of this – to the extent that the latest investment review from chairman Jonathan Ruffer starts with an acknowledgement to disappointed investors, and an explanation of the house-view that underpins the trust’s positioning.

The trust’s equity exposure, though reduced overall as a proportion of the total portfolio, was the largest detriment to performance as the cyclical value stocks favoured by the managers were hammered by increasingly risk-phobic investors. Western equities, the previous year’s strongest contributor, cost 2.3% while Japanese equities contributed -1.5%. The cost of carry associated with the trust’s options also had a negative effect (-1.1%), but we note that this puts the trust in a good position at this point – with further falls in the market likely to benefit the capital protection element of the portfolio, and any bounce potentially magnified by the equity exposure.

In NAV terms the trust is down 4.5% over one year to 11 January 2019. On the other hand, over three years it has delivered 11.5% in total - slightly more than it has delivered over five years (11%) according to data from Morningstar. These returns look pedestrian relative to the equity indices over the same period, but that is missing the point.

NAV PERFORMANCE since launch

Source: Morningstar

As we have discussed already, 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, but the core argument for this trust can be seen in its performance over the longer term.

Investors have had a relatively easy ride since the last proper bear market in 2008, a year when the trust delivered positive returns of 24% while over the same period the market lost 29%. Since the fund was launched, it has delivered annualised returns of 7.29%, not far behind the FTSE All Share’s 9.27%, whilst keeping a tight grip on volatility; with a max drawdown over that period of -8.6% in stark contrast to the 47.7% recorded by the index.

DISCRETE Calendar Year NAV Performance

Source: Morningstar

Dividend

As a matter of policy, Ruffer does not target a specific level of income. The board believes this gives the team the flexibility they need to pursue absolute returns without worrying about seeking out yield as well. Indeed, the dividend was cut in 2017 as the portfolio was generating less income than it had been previously distributing – earnings from the revenue account being depressed by the heavy weighting in index-linked securities, illiquid strategies, gold and gold equities. At present the trust generates a yield of 0.8% paying dividends twice yearly. The team believes that paying the dividend out of capital (which they would be entitled to do) is contrary to the primary objective of capital preservation.

Management

Hamish Baillie, Duncan MacInnes and Steve Russell are named managers on the trust. Hamish, who joined the team in 2002 and set up the group’s Edinburgh office, is lead manager on the trust. Hamish works alongside Duncan MacInnes, who joined the team in 2012, and Steve Russell. Steve joined Ruffer in 2003 and has more than 30 years’ experience in the City - he is also co-manager of the LF Ruffer Total Return, sister fund to the trust.

Ruffer Investment Company is effectively a microcosm of the much larger Ruffer business, set up by Jonathan Ruffer who still leads the investment strategy alongside CIO Henry Maxey. Ruffer has £21.1bn in assets (as at 30th November 2018) and 270 staff worldwide, all focused on the same ‘positive returns in all conditions’ philosophy. The trust has access to prodigious resources with more than 147 people solely focused on fund management and research, including 30 analysts.

Discount

Until last year the trust’s shares had traded at a sustained premium since the end of 2016, having before then traded in a range between a small discount and small premium for some years. Historically popular among wealth managers, the trust has seen growing demand among retail investors, and this part of the shareholder base has grown the most in recent years with more than 90m new shares issued since 2009.

More recently the trust has slipped to a rare discount, reaching at its widest point 6.9%, but coming back in again to rest at 3.5% at the time of writing. The trust has only once traded at a sustained discount: in 2007 the discount reached 7.5% and the board acted decisively, offering all shareholders an exit at NAV through a tender offer and repurchasing 16% of shares in issue at the time. We would be surprised to see the board take any similar action on the discount unless a sustained period of discount weakness occurred, and given the febrile feel of the markets at this point, the respect which the trust has among investors who remember its performance in the last crash – and the myriad risks to stability we now face – it is possible that demand for the trust’s shares is more likely to go up than down in 2019.

DISCOUNT

Source: Morningstar

Charges

RICA has an annual fee of 1% and no performance fee. Its ongoing charge figure (OCF) is 1.18%. The KID cost (or reduction in yield) is 1.56%, compared to the Flexible sector average of 3.3%.

ESG

Important information

Ruffer Investment Company is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed.

Please see the important information by following this link or at the bottom of the page.

Kepler Trust Intelligence is a website owned and managed by Kepler Partners LLP. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research.

This report has been issued by Kepler Partners LLP for communication only to eligible counterparties and professional clients as defined by the Financial Conduct Authority.  Its contents are not directed at, are not to be communicated to, may not be suitable for and must not be relied on by retail clients

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country.  Persons who access this information are required to inform themselves and to comply with any such restrictions. 

The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research. The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.  

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. 

Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. This website is published solely for informational purposes and has no regard to the specific investment objectives, financial situation or particular needs of any person.  

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

A copy of the firm’s conflict of interest policy is available on request.

Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.

Fund History: Ruffer Investment Company

More Research

Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please select a range
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
View an example
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase. We do not share your personal information and your answers are not linked to your identity for marketing purposes.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.