Ruffer Investment Company 16 October 2019

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 to ensure they generate gains and avoid losses over rolling 12-month periods.

The trust consists of different pools of assets designed to provide different return profiles in various environments. The managers, Hamish Baillie and Duncan MacInnes, have positioned RICA in alignment with Ruffer’s core investment outlook, believing that the expansion of leverage in the global economy will drive policy decisions in the coming years. Ruffer expects that the absence of productivity driven growth means the only feasible recourse available to policy makers to deleverage economies will be to attempt to push inflation higher and keep real (i.e. inflation-adjusted) interest rates negative.

With monetary efforts at reflating the economy having largely failed, Ruffer expects fiscal policy to be employed to the same end in the coming years, and ultimately anticipates a deterioration in confidence in fiat currencies. To protect against this the trust contains assets, particularly index-linked bonds, designed to benefit from an inflationary environment. However, the managers are wary of trying to time the market, and also hold a sizeable allocation to equities which should benefit from a more benign environment; this has helped improve NAV returns in 2019. Similarly, they hold sizeable protective strategies which seek to protect the trust in the event of substantial dislocations in equity and/or credit markets, which could occur around a period of deflationary data.

As a function of the rise in global leverage, they note a converging assessment of risk within the corporate bond market, and a huge expansion of BBB-rated investment grade debt. In the event that an economic slowdown precipitates downgrades of some of this debt (making it sub-investment grade), they note that a significant proportion of market participants (ETFs and mutual funds) will become forced sellers of already illiquid assets. This could cause a dislocation in corporate bond markets, which will have a direct impact on equities through both the impact of higher debt costs on profits and the likelihood of equities being sold when investors cannot de-risk by selling their corporate bond holdings. As such, the managers hold significant protection against rising corporate bond spreads and equity market volatility.

Performance has struggled in recent times, with the managers’ protective strategies acting as a drag on performance, but has improved in 2019 to date (NAV total return +7.6% in the first three quarters of the year). The managers have retained their positioning, using market fluctuations as tactical opportunities to rebalance positions in different asset classes.

There is a very clear outlook and identity to RICA, and the portfolio is appropriately invested in alignment with the managers’ expectations of higher inflation and aversion to losses. They have a successful long-term track record, generating strong positive returns of around 25% in the 2008 financial crisis and generally succeeding in providing positive rolling 12-month returns. However recent years have been challenging, with structural disinflationary forces – and increased market expectations that these will remain pervasive – providing a headwind to returns. Still, the absence so far of a significant pick-up in inflation has not prevented the ‘growth’ aspects of the portfolio from helping generate stronger recent returns. The managers note that outright deflation would be negative for their returns, though some of their assets should do well in that kind of environment, which may somewhat mitigate that adverse scenario.

For the trust’s return profile to improve significantly, we would likely need to see a change in environment from the one that has prevailed in recent years. In our view, the trust is likely to avoid substantial losses, but opportunities for substantial gains will remain scarce as long as inflation refuses to rear its head. Nevertheless, as seen so far in 2019, the equity book should help to ensure RICA makes absolute gains if the equity bull market continues. There are tentative signs that inflation could start to push ahead once again, alongside indications of increased political pressure to increase fiscal stimulus. Several strategies within the trust offer sizeable asymmetry in their return profile from here, and could generate substantial payouts in periods of equity or credit market inflection. Of late things have not gone so well for the managers; but they remain committed to their course and should inflation gather pace once again, or the global economy slow significantly, RICA should once again come back into its own.