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Ruffer: interest rates to remain 'nailed to the floor'
The Ruffer Investment Company continues to seek protection with inflation-linked bonds to complement its bigger and riskier position in Japan.
Holdings in inflation-linked bonds helped protect Ruffer Investment Company, a pick of Citywire Selection, from an 8.2% fall in global equities in the second half of 2011.
A portfolio for all seasons
The management trio of Jonathan Ruffer, Steve Russell and Hamish Baillie secured a return of 0.7% for Ruffer Investment Company ’s net asset value (NAV) during 2011 despite the tough economic backdrop. The trust’s largest loss last year, measured from its peak to trough, was 4.5% compared with 14.7% for global equities.
The fund's mix of assets aims to offer downside protection and capital growth, with inflation-linked bonds a mainstay of the trust for a number of years.
Interest rates to stay 'nailed to the floor'
Inflation-linked bonds were one of the best performing investments during 2011, and helped cushion the blow of falling stock markets. During the second half of the year, global shares fell 8.2% while UK and US inflation-linked bonds rose 15.3% and 10.9% respectively.
After such a strong rally for these so-called 'safe haven' assets, Ruffer thinks they are still essential for protection into 2012 and beyond. ‘They prosper not so much from high inflation, [but] high inflation coupled with low interest rates,’ he said.
Even though inflation has fallen from its recent peak of nearly 5.5%, Ruffer thinks any potential spike into double digits would still see interest rates ‘nailed to the floor’ as the economy would be deemed too brittle.
‘This will tear through investment values, where cash on deposit will lose money in real terms at a similar double-digit rate, and most investments will not match cash. But index–linked are exactly designed for this eventuality,’ he said.
Japan forms the largest country exposure at 24% of the portfolio, with the holdings in the CF Ruffer Japanese fund, life insurer T&D Holdings and Nippon Telecom.
Large defensive companies are also favoured in the USA (10% of the portfolio) and Europe (6%). Gold and gold mining equities are a small part of the trust (5%), and around half of this is held in the CF Ruffer Baker Steel Gold fund.
Over five years to 31 January 2012, the trust’s share price has risen 92.9% versus 80.8% for its NAV. It is currently trading at a 4% premium to NAV, and investors can access a similar strategy through the CF Ruffer Total Return fund.
Citywire Selection verdict:
Ruffer Investment Company maintained its net asset value during 2011, although the share price edged into the red over the year. Long-term returns remain very strong from one of the leaders in multi-asset investing, which has a strong focus on capital preservation. Around a third of the trust is allocated to index-linked bonds, and Japan provides the largest equity slice at 24%. The remainder is mainly held in Western blue-chip equities.
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