Ruffer Investment Company 13 May 2021

Ruffer Investment Company (RICA) is focused on preserving and growing real (i.e. inflation-adjusted) capital and the managers seek to ensure that the trust consistently generates positive returns, avoiding sustained losses over rolling 12-month periods. RICA offers a differentiated alternative for investors looking for equity-like returns with lower volatility and who seek to increase the diversification of their assets.

The managers, Hamish Baillie and Duncan MacInnes, have long propounded their view that elevated debt ratios and too little economic growth have created a vicious cycle whereby stimulative support and intervention from governments and central banks is required in ever-increasing doses, ultimately leading to an environment of structurally higher inflation. As we discuss under portfolio, they believe that recent policy moves have increased the probability of structurally higher inflation.

Nonetheless, RICA is constructed with the aim of generating positive returns irrespective of market conditions. Accordingly, RICA continues to incorporate hedging strategies not typically seen in many investment products readily available to the retail investor. These include exposure to assets such as credit default swaps, which offer asymmetrically high upside in adverse economic scenarios with limited downside. Other examples include payer swaptions, volatility strategies or, more recently, Bitcoin. As discussed under performance, these have often proved supportive in more volatile environments.

RICA’s board has been issuing shares at a premium to net asset value in recent months to grow the trust, as discussed under discount. The object is to increase net asset value and liquidity in the shares while reducing the ongoing charge ratio (OCR).

RICA ticks a couple of boxes for us. First, we appreciate the attempt to incorporate investments with potentially asymmetric payoffs into a robust structure and believe RICA seems positioned to generate gains as well as mitigate portfolio downside. Secondly, incorporating RICA into a more generalised equity portfolio has historically dampened portfolio volatility significantly and thereby provided a measure of overall asset diversification. In essence, we would argue this is a retail-friendly product with a coherent and transparent portfolio proving a hedge-fund-like return profile on less than half the fees of the average hedge-fund.

The ‘best-case’ scenario for the portfolio’s relative returns, in our view, would be a backdrop of structurally higher inflation. Yet we take comfort from the continued presence of deflationary hedges. Should disinflation persist, this may well be a headwind to absolute returns but there are portfolio positions that will benefit the fund. We show under performance that RICA has positive sensitivity to ‘tails’ of markedly higher and lower shifts in inflation expectations and think the portfolio structure in place should ensure this remains the case.