Beyond the Rubicon

Investors must learn to cope with the pressures of a fundamentally different era for markets according to Ruffer Investment Company (RICA) fund manager Jasmine Yeo, who joined the team at Kepler Trust Intelligence at our event in London last week, alongside the managers of JPMorgan Global Core Real Assets (JARA) and BlackRock Frontiers (BRFI).

Referencing Julius Caesar’s pause as he crossed the Rubicon, the river beyond which lay Rome and which, once crossed, would mark a point of no return, she said: “When Caesar crossed the Rubicon, he paused because he knew that once he did, there was no going back. We, too, believe we are in a very different era for investing; one that is much more inflation-prone, more volatile and will require a very different investment approach.

“Unlike Caesar, we don’t have a choice about what is happening, which is the result of a confluence of economic and geopolitical forces which have thrust us into this new regime, but we do have a choice about how we deal with it.”

Jasmine went on to describe Ruffer’s approach to this new environment and the positions she and co-manager Duncan MacInnes are taking to protect investors in the trust, which has a strong track record of delivering absolute returns.

RICA is designed to be an all-weather solution for investors who want to grow their capital over the long term without suffering significant drawdowns and won wide recognition for its strong performance in the 2008 crash. It has been one of a select few to have delivered strong returns during the Coronavirus crisis, as well as the subsequent collapse in markets as the virus dwindled, big tech slumped and geopolitical tensions between the West and Russia and China reached new heights.

Jasmine said the use of options and credit protection had driven performance this year, while traditional defensive assets, like gold and bonds, have done little to support returns or protect investors in the wider world. Looking forward, she said markets were banking on a soft landing, the Fed rate hitting its ceiling at 5% and a rapid decline in inflation, but warned that there was, in Ruffer’s view, little chance of these expectations being met; and new lows may yet lie in store for equities.

Our next speaker, Philip Waller, joined us from JPMorgan Global Core Real Assets, a highly-unusual trust with a very widely-diversified portfolio spread across real estate, infrastructure and transportation assets.

JARA invests mostly in institutional funds run by the J.P. Morgan Global Alternatives Group, which themselves invest in private assets and are usually not available to retail investors. These make up 80% of the portfolio, with around 20% invested in liquid, public investments such as REITs. The aim is to generate a 4% - 6% yield and 7% - 9% total return while offering diversification, inflation protection and resilience.

Philip described the impact that deglobalisation has had, spurred on by the supply-chain crunch which occurred during the COVID crisis and further accelerated by the subsequent collapse in the relationship between China and the West.

Real assets, he said, were performing particularly strongly in the ‘lifeboat economies’ which have emerged as the world’s multi-nationals have sought new destinations for their foreign direct investment amid cooler relations with the Middle Kingdom.

Changing energy pressures were also powering the portfolio’s success, he said. One of the JPMorgan institutional funds that the trust gets exposure through owns a fleet of liquified natural gas(LNG) carriers sufficient to power the cities of Los Angeles and New York, and has further commissioned a large fleet which is currently being built. Each tanker is worth up to $200m, with some even powered by the natural gas they carry as cargo, offering an environmentally-positive solution to the world’s need for reliable energy.

In an environment of higher inflation, he said, with less labour mobility, real assets are likely to continue to perform well. Philip made a convincing case that JARA offers a very interesting diversified, and differentiated ,exposure to real assets spanning the globe.

Our final speaker, Emily Fletcher, joined us from BlackRock Frontiers – a unique trust offering exposure to the world’s most exotic markets, including investments in equatorial Africa and Latin America.

Emily, who runs the portfolio alongside co-manager Sam Vecht, shared the view that inflation was likely to remain higher than markets expect in 2023 and outlined her ideas about why that is, in relative terms, good news for emerging and frontier markets.

Emily described a world divided by very different experiences of inflation, highlighting Vietnam as an example of a country where inflation is less than half that being witnessed in Germany.

“The case for emerging markets in this environment gets stronger and stronger. Fundamentals have changed dramatically and they are much less reliant on external capital than they have been in the past.”

The COVID crisis, in particular, has affected the characteristics of these markets, she said. During the worst period of the crisis, frontier markets were unable to borrow money to support and protect their populations in the same way that Western countries did, much as they would have liked to. Now that trial by fire is largely in the past, with immunity levels high and death rates sharply lower, they are in a position of improved relative strength. Having taken on little debt, unlike their Western counterparts, she thinks they are likely to be among the first countries in the world where we will see interest rates falling.

Like Philip, she also sees some frontier countries benefitting from the slump in China’s popularity as a manufacturing base, highlighting Vietnam, Thailand and the Philippines as winners from China’s loss.