Flat performance is not something fund managers strive for, but sometimes it takes a period of stasis before big returns. This is what the managers of the Ruffer Investment Company have preached, after the trust made a loss of 0.4% in net asset value (NAV) total return terms for the half-year to December 2024. In share price terms, the value of the company rose 0.2% over the past six months. It means across 2024 the company returned next to nothing while the rest of the market soared.
But the managers (Jasmine Yeo and the newly appointed Alexander Chartres and Ian Rees, who stepped in when Duncan MacInnes left the firm in an immediate “cloak and dagger” departure last month) weren’t defeatist.
They expect market fundamentals and prices, which in their view have decoupled in recent years, to converge again soon allowing for “a redemptive performance moment, like ketchup from a glass bottle”.
“There is no denying we are at a painful moment for Ruffer and our shareholders,” they wrote. “Perhaps then it is not surprising that opinions on Ruffer are somewhere near rock bottom while, simultaneously, views on the equity market are as favourable as they ever have been. We are fully aware that we have tested the patience of our shareholders. However, we would ask that you judge us on our full body of work”.
The managers admitted their fault in getting the cyclical thesis wrong: there was no recession but “an aggressive disinflation and a resurgence in animal spirits” in the period.
On the other hand the structural thesis was “so far spot on”, including sticky inflation, financial stability preferred to monetary stability, geopolitical fracturing, the rise of populism and state-directed capitalism. All these mean their concerns have only grown, especially as valuations and positioning in markets have both become “extremely extended”.
The portfolio therefore remains biased to protection, with a basket of defensive derivatives as its core building block. However, the managers now believe it is “crucial to have sufficient offsets to carry these protections and keep the portfolio afloat should markets remain benign”.
To aid this balance, they made several tweaks to the portfolio over the year including an increased allocation to growth assets and an increased equity weight, which rose from around 17% to 30% by year end.
In particular, they added to China and commodity equites in September, as well as to “a liquid basket of US stocks” to gain more exposure to a broadening-out within US markets.
On the protection side of the portfolio, they temporarily increased duration via 10-year US inflation-linked bonds in late April and early May, with real yields of well over 2%, and sold as yields fell sharply again in early August.
“Towards the end of the year, we added to long-dated UK inflation-linked bonds, taking portfolio duration to 1.9 years”, they explained.
“Whilst returns remain unsatisfactory, we have been working hard to maintain sufficient portfolio balance, with our base case yet to play out. This recent performance is closer to what we would expect from the Ruffer portfolio at this stage of the cycle – unexciting but treading water – as we favour protection over growth for the time being.”
They concluded: “If the S&P 500 were trading at 4,000 after falling by a third, many would probably be happier with our current defensive positioning than they are today when it trades at 6,000.
“But, with the index having risen 66% from the lows of 2022, we would suggest that is precisely the wrong way round to think about it. We are determined not to let our poor performance tempt us into abandoning our caution at exactly the wrong time. Just because something hasn’t happened, doesn’t mean it won’t happen.”