As markets continue to deal with supply chain disruption in China, elevated geopolitical tension in Europe and the potential for runaway inflation, investors may be looking for a defensive allocation to add to their portfolios.
There are two investment trusts that stand out as potential options for investors looking a safe haven amidst the current market volatility: The Personal Asset Trust and the Ruffer Investment Company, which are both FE fundinfo five-crown rated.
On the surface, it appears that the two strategies are very similar: both aim to limit the downside while generating capital growth, both use a multi-asset approach, and both focus on absolute return rather than relative return.
More importantly, both also have well-established track records of preserving capital over the past decade and have held up well more recently during the past three months of market volatility.
Performance of the trusts vs sector & MSCI World index over 3 months
Source: FE Analytics
But for investors considering adding to their defensive exposure and are struggling to choose between the two, Trustnet asked experts which strategy they preferred and why.
Dzmitry Lipski, head of funds research at interactive investor, said he likes the ‘no surprises’ approach of Personal Assets Trust, which may appeal to more cautious investors.
“I think of Ruffer as a hedge fund for private investors, with an unconstrained approach that combines both conventional with, at times, less unconventional, contrarian asset classes,” he said.
“Large allocation to index-linked bonds and their contrarian stance contributed to strong performance year-to-date and over the longer term (and is in stark contrast to some more high profile – if brief – flirtations with crypto).”
Indeed Ruffer’s successful bitcoin trade in 2021 was what helped the trust deliver its best annual return in more than a decade.
Lipski contrasted this approach to Personal Assets, which has a more “cautious” portfolio that is reflected in the more modest performance returns, albeit with lower drawdowns.
He said: “We’d be surprised if crypto made an appearance in the portfolio, even if fleeting.”
Lipski also noted Ruffer’s larger allocation to value-style equities versus Personal Asset’s more geographically spread, quality-biased equity exposure.
This different type of allocation is what James Sullivan, head of partnerships at Tyndall Investment Management, said investors should consider most when looking at the two trusts.
“The most notable differential isn’t at an asset allocation level, where they both harbour similar weightings to equities, bonds, and gold – it is more about the makeup of such asset allocation,” he explained.
“Troy [the managers of Personal Assets] has always adopted a quality-growth approach, giving credence to companies that exhibit repeatable and recurring revenues that are not too cyclical.
“Whereas Ruffer, within their top holdings, has exposures to Shell, BP, Lloyds, and NatWest: four stocks that would identify as cyclical, and certainly more value orientated.”
He noted how the performance of both trusts over the past decade was “almost identical”, but noted that the volatility between the two (6.5 versus 8.9) was stark. Indeed, the Personal Assets Trust is up 64.2% over that period versus the Ruffer Investment Company’s 71.8%.
Performance of the trusts over the past decade
Source: FE Analytics
Although neither Troy nor Ruffer would want to be labelled either ‘contrarian’, ‘absolute return’ or ‘perma-defensive’, Sullivan said both have adopted these monikers at points in their respective journeys, because of their tendency to adopt a relatively conservative asset allocation.
He said: “This is less of a fund battle in the true sense, it’s more of a debate of which is one's preferred emergency service.”
Similarly, Ewan Lovett-Taylor, head of investment companies research at Numis Securities, said it is tough to pick between the pair because both have high-quality managers and great track records.
However, he suggested the Ruffer Investment Company was an “attractive portfolio diversifier” given its track record in insulating against market falls.
He noted how during the global financial crisis its net asset value (NAV) rose 26% in 2008, versus 30% fall in the FTSE All Share and again during the first quarter of 2020.
“The fund is managed with a capital preservation mind-set,” he said. “The fund performed strongly in 2021, helped by its flexible approach, with performance boosted by some relatively short-term exposure to bitcoin’s strong run.
“The managers’ expect persistent inflation but the pathway is unclear and therefore they are equally concerned about inflation volatility. As such they maintain exposure to investments that will perform in a range of scenarios.”
However, Lovett-Taylor also acknowledged that the Personal Assets Trust has a good track record under the tenure of Sebastian Lyon, which is “creditable” given the fund’s low exposure to equity markets.
Investors may not have to choose between one or the other, according to Ryan Hughes, head of investment research at AJ Bell, who said both have merit and that investors might want to explore how they could work well in combination.
“While we have a preference for Personal Assets given it’s relatively simple and transparent approach, Ruffer shows that there is a different method of getting to a similar outcome and therefore both would work well in combination for clients looking for an immediately well-diversified core to their portfolio,” he said.