Summary

Ruffer Investment Company is an unusual investment trust focused squarely on absolute returns. It invests primarily in ‘long only’ assets – equities and bonds – but also uses currencies and derivatives as part of its investment process.

The trust was set up in 1994 by Jonathan Ruffer, who founded the asset management company which bears his name. He is still involved in the investment process, but the trust is managed on a day to day basis by Steve Russell and Hamish Baillie.

Ruffer is privately owned via a partnership structure which gives the management clear continuity and it has a strong investment process with capital preservation at its heart stamped through the entire business. The group manages assets more than £18bn, and has something of a cult following having successfully predicted the credit crunch and positioned its portfolios to cope with the storm which broke in 2008.

The managers remain convinced that the underlying cause of that storm – the colossal debt burden carried by the world’s major economies – has not gone away and their outlook is correspondingly grim.

The team at Ruffer operate with two well-known investor emotions in mind – fear and greed. When fear is dominant, the portfolio tends to be slanted toward bonds. When greed is in the ascendant, the team builds its exposure to equities.

The present portfolio positioning reflects the deeply gloomy outlook which the team at Ruffer – one of the best performing vehicles during the GFC thanks to their correct assessment of the picture in 2007 – think has a number of potential outcomes, none of them good.

They point to the fact that global debt has increased by more than $50 trillion since the start of 2008, when the Great Financial Crisis (GFC) began, largely in the form of spiralling corporate and government debts.

Cash, in their view, is no shelter from what lies ahead as they think the world’s governments – having failed to ignite inflation via QE – are unlikely to give up and will use fiscal stimulus, Keynesian style housebuilding projects in the UK for example, to inject further heat into the economy.

The inevitable result in their opinion is that inflation will take off, and do so with a vengeance, as governments will be unable to restrain it using interest rates – because any significant rise will have disastrous consequences, the UK housing market being a prime example of why this might be the case.

With this in mind the team at Ruffer have positioned the portfolio to benefit from what they forsee as a period of ‘1970’s style’ inflation – a period known in the US as the Great Inflation when it ran as high as 14% – with heavy exposure to index linked bonds.

Index linked bonds are bonds which pay a fixed interest rate which is tied to inflation, which means they are protected in an environment where inflation is on the rise. 23% of the portfolio is held in US index linked treasuries (TIPS) and 20% is held in index linked gilts – the UK equivalent. Cash amounts to 7%, while gold makes up 6%. Equities in total make up just 33% of the portfolio, and the majority of that is in Japan.

Fig 1.

Source: Ruffer

Japan, in the managers’ view, is a special case as far as equities are concerned. Prime minister Abe’s active stance means it will be the first country to commit to proper fiscal stiumulus, they think, and its corporations are far less heavily endebted than their European and American counterparts. Corporate Japan, they point out, has more spare cash hanging around on the books than would make up the GDP of Italy.

They view fiscal stimulus here as essential, though, and say that if it becomes clear that none will take place they would ‘think again’ about their exposure.

Fig.2

Source: Ruffer

Ruffer Investment Company is a total return fund, so its performance relative to many of its peers can at times seem rather mundane. It does not exist, however, to outperform its peers – or anything else apart from cash, and the managers are very clear about this.

Ruffer as a whole (the asset management company and the trust) has two core aims – to produce returns which are greater than those available on cash, and not to lose money for its investors on a rolling 12 month basis.

As the chart below shows, the trust has produced NAV total returns of 16% over five years to date, while the average trust in the sector has produced 26.5%. The FTSE All Share has produced 34% over the same period.

Fig 3.

Source: Morningstar

More interesting, and more appropriate as a test of the managers’ mettle, is to look at the trust’s performance on a discrete annual basis. As the chart below shows in 2008, when the FTSE lost 29.9%, the trust delivered positive returns of 24% – a margin of outperformance of more than 50%. Again in 2011 when the FTSE was down 3.5% the trust remained in positive territory and, in fact, in only two of the last ten calendar years has the trust lost money – and then in each case losing less than 2%.

Fig.4

Source: Morningstar

This is not a trust for those who wish to keep up with a bull market, but the managers have shown themselves capable of performing well in relative terms during periods when the market is heading down, losing money in real terms rarely, and when they do not by any significant margin.

Gearing

The trust has the ability to gear but, in reflection of the managers’ bleak outlook, does not use it and were it to do so, would do so tactically rather than via structural (permanent) deployment.

The trust was originally set up by Jonathan Ruffer and the investment team at Ruffer operates in a collegiate fashion, with Jonathan still involved in investment process, but Steve Russell, Hamish Baillie and Duncan Macinnes as named managers on the trust.

Hamish, who joined the team in 2002 and set up the group’s Edinburgh office, is lead manager on the trust. Hamish works alongside Steve Russell, who joined Ruffer in 2003 and has more than 30 years’ experience in the City and is co-manager of the CF Ruffer Total Return investment company, sister fund to the trust. The pair are supported by Duncan Macinnes who joined the team in 2012.

In the years which followed the credit crunch the trust enjoyed a period where it was trading on a large premium – demand for its shares surging on the back of its success during that period when many others were on their backs. In the years that followed this premium gradually fell, until in 2013 it moved to a discount.

As the chart below shows, this discount has flipped between a discount of around 4% and a premium at a similar level over the last ten years, trading between -3 and +3.2% in the last year according to data from Morningstar. Relative to many investment trusts this is a narrow range, however those seeking an alternative to open ended absolute return funds should bear in mind the impact of this discount volatility, muted though it may be. The trust has the authority to buy back shares to control the discount, but in reflection of the limited nature of the discount during that period, did not use it in 2015.

Fig.5

Source: Morningstar