Ruffer Total Return fund prepares for trouble ahead

LF Ruffer Total Return (GB00B80L7V87) is an example of a fund that avoided significant losses this year, and it was up 7.55 per cent year-to-date as at 10 August. This compares with the Investment Association’s Mixed Investment 20-60% Shares sector average, which was down by more than 12 per cent at the end of the first quarter and down by 2.6 per cent year-to-date.  

“Coming into the crash the portfolio was set up robustly because we had long been worried that markets were avalanche-prone and as we look to preserve capital we had to have crash protections in a variety of forms,” says Alexander Chartres, investment director at Ruffer. 

By owning a number of derivative-based products, the fund was able to mitigate nearly all losses from the 40 per cent of the fund that was invested in equity markets. Mr Chartres says that the largest positive contributor to performance in the first quarter was the “large position” the fund held in credit default swaps, designed to profit from seizure in the credit markets during a sharp sell-off, which delivered a gain of 6 per cent for the fund.

Mr Chartres says the fund also had protection with equity market put options, which enabled the fund to sell shares at a predetermined price when markets fell. These put options, combined with CBOE Volatility Index (VIX) call options, which allowed the fund to profit from a rise in market volatility, delivered further positive returns of 4 per cent in the first quarter.

More recently Mr Chartres has been taking profits from some of the positions that did well for the fund in the first quarter, and during March lows he topped up the fund’s positions in US inflation-protected bonds, gold mining companies and a range of other holdings.

“Because we preserved capital through the opening phase of the crisis we were able to pick and choose what we liked because basically in March everything was on sale. It wasn’t just equities, fixed income was selling off violently as well, the same for gold, and that allowed us to pick up things we thought looked particularly attractive,” Mr Chartres says. 

He adds that they bought a “sizeable chunk” of US inflation-linked Treasury bonds because amid all the uncertainty the one thing they could be sure of was that the Federal Reserve would flood the market with liquidity and buy inflation-protected securities. 

One third of the fund is currently held in inflation-linked bonds, with 11.5 per cent in the UK and the rest largely in the US. Mr Chartres says this is because the managers believe that, with debt levels as high as they are, authorities will contrive to keep interest rates low, allowing and encouraging inflation to move higher. 

The fund's equity exposure has been reduced from roughly 40 per cent in February to around 29 per cent. This is because in February it was possible to buy market protection such as VIX call options and equity market put options at attractive prices, but they are now significantly more expensive. 

Mr Chartres says they have looked for defensive opportunities elsewhere, and now have calls on the Japanese yen, which could, should there be another risk-off event in markets, be like a “super dollar” with Japanese repatriated money driving up the value of the currency.  

The fund has also increased exposure to Japanese equities, which often have much less debt than western companies, making them financially more robust. “The Topix has 55 per cent of companies with net cash, compared with America where it is something like 15 per cent,” he says, adding that Japanese companies are also available at much lower valuations. 

Credit protection strategies made up the majority of the fund’s returns in the first quarter, and while these were dialled down after the crisis as more attractive opportunities appeared elsewhere, Mr Chartres says he is starting to add credit protection again. 

“One of the things that has happened since the liquidity hose was turned on is that credit markets have risen sharply and we think they do not come anywhere close to recognising the risk of the fallout induced by this unprecedented coronavirus recession," he says.

Gold has been another asset that has helped drive the fund’s performance this year. Almost all of the fund’s gold exposure is through gold mining equities, rather than bullion, as gold mining companies offer a leveraged play on the gold price. Mr Chartres says the team has had "a very bullish outlook on gold and that is because we have had a very bearish outlook on the ability of paper currency to provide value for people”.

Mr Chartres is now taking some profits from gold mining companies at the margin, but gold remains an essential part of the fund’s allocation. “If you think as we do that the outlook for fiat currency is not good then you want to own plenty of gold,” he says. 

Asset allocation

Source: Ruffer July 2020 Factsheet

Performance

Source: FE Analytics, 7/08/2020