- Ruffer’s bearishness has been a headwind in 2023
- But it should act as a hedge if recession hits hard
- It could have acted more quickly to combat the discount
Ruffer Investment Company (RICA) has struggled this year, leaving investors wanting on its promise of “consistent positive returns, regardless of how the financial markets perform”. However, the popular trust’s managers have recognised their mistakes and have been in similar situations before, raising hopes that the underperformance is no more than a blip
The trust's net asset value (NAV) is down by 9.5 per cent between the start of the year and 6 October, with the share price doing even worse, losing 13 per cent. As its recently published annual report to June 2023 highlighted, managers Duncan MacInnes and Jasmine Yeo did not call the timing of recession right. Ruffer is known for its consistent bearishness, but it has been blindsided by how long the consequences of rate rises have taken to show.
The managers wrote in the results that they “underestimated the willingness of the US consumer to keep spending” and said that the predominance of fixed-rate mortgage deals in the UK, and the cash savings accumulated during the pandemic, had delayed the impact of rate rises.
Ruffer has built its name on its use of protection strategies, such as options, which give it more flexibility to diversify than other multi-asset and capital preservation rivals. Illiquid strategies and options accounted for 14.5 per cent of the portfolio as of the end of August and helped the trust during the market drops of 2022, when shareholders enjoyed a cushy ride as both bonds and equity markets struggled. Ruffer’s share price rose 7 per cent in the year.
The idea is that either equity markets go down and the protection strategies do well, or equity markets go up and the trust’s exposure to shares offsets the costs of underperformance from the protection strategies. But in the six months to June 2023, protection strategies and derivatives cost the fund 4.3 per cent, while equities only contributed 0.9 per cent.
This was partly because the trust’s allocation to equities has been low (14.2 per cent as of August) and partly because it has limited exposure to the big US tech stocks that drove the bull market earlier this year. Ruffer’s protection strategies work best at times of high volatility, so a prolonged period of lukewarm malaise is not ideal. In August, the NAV was down 0.9 per cent as “market declines were not sharp or deep enough to trigger our potent derivative protections”, the managers said.
In addition, non-sterling currency exposure reduced the NAV by 2.7 per cent in the six months to June. Yen weakness and “surprising” sterling strength created a “double whammy” for the fund, which has a 16.2 per cent exposure to the Japanese currency to act as a safe haven in rocky times.
A bearish outlook
MacInnes and Yeo have recognised that performance has been disappointing. “We share in the pain of our shareholders in having lost money over the past year and acknowledge this represents a failure of our objectives,” they said.
But, with 40.2 per cent in short-dated bonds, the trust is positioned for more averted bad news. The managers believe this is merely delayed, not averted and expect a recession, a liquidity crisis and a “global, synchronised de-risking of portfolios” caused by high interest rates. The trust has also been betting on long-dated US and UK inflation-linked bonds in the belief that central banks will cut rates when the recession finally hits. Bond yields have spiked in the past month as markets contend with the idea that rates will stay higher for longer, so that bet could still take a while to pay off.
Mick Gilligan, head of managed portfolio services at Killik & Co, said Ruffer should do well if things go very wrong. In a more severe ‘risk-off’ scenario without further rate rises, long-dated bonds should perform well and the yen should become a safe haven once again. “If risk markets continue in the same fashion as they have year-to-date, the NAV may continue to drift lower. However, the trust does provide something different and is likely to be a useful hedge in an extreme risk-off scenario,” he argued.
As a result of its weak performance, the trust went from trading at a premium and issuing shares in 2022 to trading at a discount this year. In August, the trust’s board started its first ever share buyback. But James Carthew, head of investment company research at QuotedData, argued it came too late. “It could and should have acted far faster to stem the tide of discount widening,” he said. “The very modest buybacks that it has undertaken since seem to be working, with the discount now below 3 per cent versus over 7 per cent at its widest in July.”
Ruffer’s main competitors in the wealth preservation sector, Personal Assets Trust (PNL) and Capital Gearing Trust (CGT) have zero-discount policies. As of August, Personal Assets had a higher exposure to equities than the other pair at 23 per cent, and its NAV has been flat in the year to date. Capital Gearing had a 43 per cent exposure to index-linked bonds and its NAV is down 3.3 per cent in 2023 so far.
Ruffer has a long track record of shielding investors in difficult times, a key reason why it is still part of Investors’ Chronicle's Top 50 funds list. Investors who think the markets are underestimating the pain to come and want better diversification might want to stick with it despite a tough year so far.
