FE Alpha Manager Steve Russell and Hamish Baillie have defended their 5.7 per cent in gold, the fund’s second-largest position, in their latest note to investors, following the metal’s shock collapse in value over the previous month.
At one point gold had lost 15.42 per cent since 1 April and is still down 9.78 per cent.
Russell and Baillie say they are baffled by the cause.
Performance of gold in 2013
Source: FE Analytics
However, they retain their confidence in the metal’s inflation-hedging powers and say it is the only way to protect against the tail-risk of sovereign default.
"We have written in the past that we have always felt that gold makes an uncomfortable and yet necessary bedfellow and this month’s price move was a painful reminder of that fact; in dollar terms the gold price fell 7.6 per cent (9.7 per cent in sterling) in April." "Many theories have been put forward to explain the sell-off but the truth is that we will probably never know exactly what the drivers were."
"Gold is impossible to analyse as it is fundamentally a pretty useless thing; supply may fluctuate as mines come on and off line, central banks buy and sell and there will be some demand fluctuation from the Indian jewellery market, but the price of gold is overwhelmingly determined by investment demand (or speculation, as the cynics might say)."
"However, as long as gold is not able to be created by alchemists it will represent a store of value and no more so than at times when central banks are endeavouring to debase their easily printable paper currencies."
"We have ample protection from monetary instability in the shape of our index-linked bonds."
"This is a much larger weighting (27 per cent) than we have to gold (8 per cent) and for good reason – index-linked bonds are a relatively simple play on real interest rates whereas gold is held by different people for many different reasons: currency debasement, inflation protection, geopolitical risk, financial Armageddon and so on."
"However, index-linked bonds do not give us protection from rising sovereign risk and the threat of government default; gold does provide such protection and for that reason will continue to form part of our asset allocation until that threat has disappeared."
"It would be much more worrying if gold was deserting us at a time of financial stress but its volatility is easier to stomach when the rest of the portfolio has been pretty robust."
The £327m Ruffer Investment Company is one of the best-performing global investment trusts over five years, with returns of 88.62 per cent, according to data from FE Analytics.
Performance of trust vs sector over 5yrs
Source: FE Analytics
This is built largely on its outperformance in 2008, although performance in recent years has been relatively weak, thanks to its more cautious approach.
However, the trust is up 12.25 per cent since the start of the year.The fund’s holdings in index-linked bonds are helping to produce positive returns, but it is the weighting to Japanese equities that has had the biggest effect.
On a number of occasions over the past few decades, Japan has seen renewed optimism around its markets, only for a change in direction to disappoint.
Three months ago the managers said they thought this rally was based on more secure foundations, most importantly the restructuring of the banking system.
The managers say that the exposure to Japanese equities was worth 1.5 per cent of growth in the last month alone, and they have trimmed back on one of their more successful holdings in the sector: Sumitomo Mitsui Financial Group, which has appreciated 89.5 per cent since they bought it.
"We also sold our holding in Mondelez, the confectionary offshoot of Kraft, which again has been an excellent performer (up 61.6 per cent) but we are concerned by its exposure to potentially weakening emerging markets, which make up 45 per cent of its sales," the managers wrote.
One of the reasons that retail investors are often reluctant to buy investment trusts is the added complication of discounts and premiums.
However, the Ruffer Investment Company uses share buybacks and issuances of equity to keep it trading near to net asset value. It is currently on a small premium of 2.6 per cent.
One of the major attractions of the trust, and reasons for it trading on a premium, is the low volatility.
Over the past five years it has an annualised volatility of just 9.21 per cent, according to data from FE Analytics, compared with 17.05 per cent for the MSCI World index. This is despite having 62 per cent in equities.
Japanese equity exposure makes up 20 per cent of the fund, including a 3.5 per cent holding in Ruffer’s Japanese fund.
The team also has a further 11 per cent in UK stocks and the same amount in US shares, with 5 per cent in each of the Far East and Europe.
As well as the fund's 5.7 per cent in gold, it has a further 4.3 per cent in gold mining equities.