Ruffer Investment Company 29 October 2024
Disclaimer
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’s (RICA) aim is to deliver consistent positive returns, regardless of how financial markets perform, while protecting against market falls. The board’s view is that if this can be achieved, then real returns can be delivered. The managers, Duncan McInnes and Jasmine Yeo have a keen eye for the risks to markets and a contrarian tilt. They have full freedom to invest across asset classes in order to meet their objectives and find assets that can perform well in multiple environments, most importantly if equities and/or bonds do poorly.
The portfolio is currently full of assets the managers call ‘ugly ducklings’, meaning assets which are overlooked and unloved and therefore cheap. Examples among many include the Japanese currency, derivatives protecting against credit spreads widening, China equities and gold miners. Being cheap and unloved typically means having an asymmetric return profile—lots of potential upside in the right scenario and limited downside in the wrong scenario. Many of these positions paid off in a big way in August when equity markets suffered a flash crash (see Performance section), and arguably this was proof of concept for the managers’ positioning.
Duncan and Jasmine argue that investors are complacent, with a ‘soft landing’ of gently lowering inflation and interest rates and a modest, if any, recession priced in. RICA’s positioning should mean it does best if these assumptions prove over-optimistic, while there are some growth assets in there to deliver returns too.
After an outstanding 2022, returns to RICA have been sluggish since. RICA issued huge amounts of shares in 2021 and 2022, with the trust trading on a premium consistently. After this weaker performance, the trust has slipped onto a Discount, and the board have taken significant action with a meaningful buyback programme which has kept the shares trading close to par.
We think RICA offers valuable portfolio protection in the current environment. There is a clear consensus in the markets that US rate cuts can proceed without leading to a rebound in inflation and without being accompanied by a significant recession. You don’t have to be convinced this is wrong to worry about what would happen if it were. We think it is striking that the managers report their derivative protections are cheap despite all the risks that abound in markets and would suggest it is often a good strategy to buy insurance when it is cheap.
In particular, we think investors should be concerned about the potential for equities and bonds to both do badly at the same time. We saw this in 2022 when RICA delivered excellent performance as bonds and equities were under the cosh. The managers argue that historically, correlations between the two asset classes have been high when inflation has been high. Inflation remains persistent, and there is a possibility the average inflation we are going to see over this cycle is much higher than it was in the post-financial crisis era. Believing we are going to go back to near-zero interest rates with all that means for equity markets could be the source of the current consensus positioning across markets. If inflation remains persistent and volatile, and rates have to be kept higher—and maybe the Fed is forced to raise rates before the expected cutting cycle is complete—this could have major implications for asset prices, particularly if the consensus on the future crumbles.
Bull
- Strong track record of making good returns while limiting drawdowns, especially in crises
- Well-positioned for an inflationary environment, in contrast to many other strategies
- Current discount may offer a rare opportunity
Bear
- Long-term and contrarian approach can lead to periods of sluggish performance
- Could suffer if central economic theses are proven wrong
- Positions can be complex and hard for investors to understand