Ruffing things up

However, last month I introduced Ruffer Investment Company (RICA) to both portfolios. This absolute return trust targets an annual total return of at least twice the Bank of England Base Rate and has delivered on its promises – positive total returns every year, including in 2008 (). Its focus on capital preservation and conviction investing, almost unique in today’s world of relative returns and short-termism, has allowed it to avoid most pitfalls and accumulate an enviable longer term track record.

Speaking with Steve Russell, who co-manages the trust with Ruffer founder and Chief Executive Jonathan Ruffer, we agree on the other attractions. Around one-third of the trust's portfolio is invested in index-linked bonds. I remain concerned about the incipient threat of inflation, which is why I increased my gold exposure last year.

For 30 years, the bond market has rewarded those governments which tamed inflation. However, this may be about to change. QE2, along with last month's US growth package adding perhaps $1trn to the federal deficit and 1 per cent to US growth forecasts, and record low interest rates to help bolster consumer confidence and a still fragile banking system, all point to higher inflation regardless of whether China's exports keep rising in price.

Indeed, this danger is so clear and present that many harbour a suspicion that higher inflation is a desired objective rather than just a balanced risk. After all, it would helpfully erode the unsustainably high levels of government and household debt. Even if higher inflation does not take hold, the perception that it may, together with a relatively small index-linked bond market, could make for attractive returns over the medium term.

Other Ruffer attractions include a 20 per cent plus exposure to Japanese equities, which I think are undervalued, and 7 per cent exposure to gold mining companies, for reasons cited in previous columns. This all makes RICA worth buying despite standing at a small premium to NAV, a level that's in line with its long term average.

The Growth Portfolio

The income portfolio

Other changes

To help pay for RICA, I have sold the Perpetual Corporate Bond unit trust in both portfolios. This fund had captured well the run in the market during the last couple of years. However, whilst I still prefer corporate bonds over gilts, the time has come to bank a handsome profit. I have also sold Edinburgh Worldwide trust (EWI) in the Growth portfolio after a reasonable run and a narrowing of its discount to well below its long term average.

Meanwhile, I've switched trusts in the technology sector. Over the last couple of years, both portfolios have benefited from the Polar Capital Technology trust (PCT), which has more than doubled in price as the sector performed well and the discount narowed. But I now deem a 3 per cent premium to assets too expensive.

Remaining positive about the sector, I have introduced Herald investment trust (HRI) standing on a 19 per cent discount (and a ). Its performance is comparable to PCT but its discount may be explained by its focus on smaller technology, telecommunication and multimedia companies. In my view this is a positive for reasons given in previous columns - most recently "" (3 September 2010). Consensus advises against smaller companies, but sentiment lags behind good fundamentals and this presents a buying opportunity.

Similarly, I have also introduced BlackRock Smaller Companies trust (BRSC, another ) to both portfolios. An excellent track record, a focus on growth including a 25 per cent exposure to technology, combined with a 17 per cent discount, was too tempting. Otherwise, I have sold the scrap of Artemis Alpha trust subscription shares (ATSS) recently issued as a result of the trust acquiring a Gartmore portfolio, as such shares are not suitable for either the Growth or Income portfolio.

Portfolio performance (since Jan 2009)