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Investment trust Ruffer has a track record of making money in up and down markets and can help guard against inflation
Thursday 08 Jul 2021 Author: James Crux

Global equity markets have performed strongly year-to-date thanks to a cocktail of reopening optimism, forecast-beating corporate earnings and a boost from continued central bank largesse.

Yet the looming threat of inflation has the potential to roil markets with the US Federal Reserve having hinted that interest rates could rise earlier than expected and with central banks around the world set to wind down Covid stimulus at some point.

At the same time, pockets of exuberance in everything from so-called ‘meme’ stocks to cryptocurrencies are giving seasoned investors the jitters.

Given this uncertain backdrop, Ruffer (RICA) look very appealing, given it has a proven track record of making money in up and down markets.

We think it is well worth paying the 2% premium to net asset value to access Ruffer, a wealth preservation specialist which should help investors guard against the threat du jour, inflation. It would certainly suit a nervous investor who wants some market exposure but without excessive risks.


Managed by Hamish Baillie and Duncan MacInnes, Ruffer focuses on preserving and growing real – i.e. inflation adjusted – capital, regardless of financial market conditions. Since Ruffer started in 2004, its investment process has produced returns ahead of equity markets, but with much lower volatility and risk.

This flexible investment trust can invest in multiple asset classes including individual shares – the likes of BP (BP.), Tesco (TSCO), Lloyds (LLOY) and Italian bank UniCredit were in the top 10 at last count – as well as index-linked government bonds and gold. Its ongoing charges are 1.08% a year.

Its wide mandate also includes scope to invest in unconventional asset classes, leaving Ruffer well-equipped to deal with the increasing inflation and economic and market volatility that Baillie and MacInnes see ahead.

Ruffer invested in bitcoin in late 2020 before selling out completely at a substantial profit in early April 2021. Speaking on Shares’ podcast, MacInnes explains that last year, the macro environment was ‘perfect for a gold-like money that is digital and independent of governments and central banks’.

What changed dramatically was the price of bitcoin, which triggered the outright sale. ‘At the top it was up more than 400% from our purchase price in just five months,’ he explains.

Bitcoin may yet prevail, but MacInnes and Baillie were concerned by signs of froth, hence the highly profitable sale. ‘In our view in the short term, bitcoin was exhibiting risk-on characteristics and therefore no longer fulfilled the role that we bought it for, which was as portfolio protection.’


Markets were recently spooked by the Fed’s forward guidance that US interest rates could go up earlier than expected, though MacInnes says investors shouldn’t overreact to this. He thinks it is all a bit of a storm in a teacup – ‘effectively, they’ve said that they are thinking about raising interest rates by a quarter or a half a per cent, two years from now.’

Moreover, the Ruffer manager believes the major problems that existed before the pandemic remain the same, namely too much debt and too little growth.

He believes governments and central bankers are going to do everything that they possibly can to ease the debt burden and to stimulate growth. ‘That requires keeping interest rates very low, so below the rate of inflation, and that creates a really big question mark over the role of bonds in portfolios,’ he says.

MacInnes pinpoints two great fears that should be keeping investors awake at night; the first is inflation, which is making ‘a generational comeback’, and the second is the question of whether or not the balanced ‘60-40’ portfolio (60% shares, 40% bonds) is dead in light of a recent odd dynamic which has seen equities and bonds become positively correlated.

According to MacInnes, this dynamic is a problem for investors who now face a menu of asset classes offering lower than expected returns, negative returns after inflation and a lack of diversifying and protective characteristics.


‘The simple answer is that your bond allocation, which is 10%, 20%, 40% or whatever it is, should become a Ruffer allocation. We’ve done the thinking and preparing on this for you,’ says the fund manager.

If bonds will no longer cut it in a lower return, inflationary world, investors need to transition into an array of real assets which multi-asset trust Ruffer can provide exposure to – think inflation-linked bonds or gold, the largest contributor to the trust’s returns in May, as well as property, infrastructure, carbon credits and commodities.

‘The challenge is to own the right ones, in the right amounts at the right time. That’s going to be the trick,’ says MacInnes, adding that Ruffer has been ‘dialling down the risk in our portfolio, so reducing equities and increasing cash and other protections after a period of quite strong returns. It just doesn’t feel like an environment to be taking lots of risk. I think caution is warranted.’

The investment trust has outperformed the UK stock market over the past three and five years, returning 26.6% and 41.1% respectively. In contrast the FTSE All-Share index of UK stocks has returned 8.9% over three years and 37.1% over five years. However, it must be noted that Ruffer has lagged on a 10-year basis, returning 60% versus 86.4% from the benchmark index, according to FE Fundinfo.

Fundamentally, investors should understand that a multi-asset trust like Ruffer will generally lag a strong rising market but equally it could do better on a relative basis when markets lose momentum or are weak.

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