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.