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Ruffer: the significant risks of radical monetary policy

Japan's move into negative rate territory last month has left Ruffer managers Hamish Baillie and Steve Russell worried about a loss of confidence in paper money.  

Ruffer: the significant risks of radical monetary policy

The Ruffer investment team has become increasingly concerned over negative interest rates becoming the norm in a number of countries across the globe.

Ruffer Investment Company (RICA ) managers Hamish Baillie (pictured left) and Steve Russell (right) aired their concern in their investment commentary covering February, a month which saw Japan implement negative interest rates on excess bank reserves.

While the pair highlighted the country was not alone in taking this step, with Sweden, Switzerland, Denmark and the European Central Bank already there, they pointed out that Japan's move was more profound and far-reaching.  

‘Global banks (including our Japanese ones), already under pressure following the falls in energy and commodity prices, were knocked again,’ the duo said.

‘The gold price perked up as the credibility of central banks was called into question and markets fretted over the possibility of a rerun of the 2008 crisis.’

This, Baillie and Russell said, opened the door for the ‘whispers of more radical policy response becoming mainstream.  

‘Since 2008 we have seen a continual creep in the radical becoming mainstream,’ they said.

'Quantitative easing, once considered reckless, is now a primary policy tool. Zero interest rates were implausible, but now negative rates are becoming widespread.

'This drift into increasingly radical areas of monetary policy, while necessary as an antidote to the high-debt/low-growth hangover of the financial crisis, comes with significant risks.'  

The pair added: ‘Fiscal tools are blunt and their use greatly increases the chances of a slip-up and the accompanying loss of confidence in paper money as a store of value (or its electronic equivalent if the proponents of the cashless society have their way).

‘The direction of travel remains constant and the harder it becomes to generate sufficient economic growth for indebted economies to deleverage, the more experimental and extreme simulative policies will become.’

The £310 million Ruffer Investment Company saw its net asset value (NAV) dip by 0.3% in February. It is best known for having protected shareholders' capital during the financial crisis. Over the past five years the trust's portfolio is up 13.4% versus an average of 30.8% in the AIC Flexible Investment peer group and 48.3% gain by the FTSE World index. Shareholder total returns have been lower, however, at 4.7%. The shares trade on a -2.3% discount to NAV. 

6 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Mar 10, 2016 at 10:36

is it not better to preserve capital by increasing capital while the sun shines and then protecting that gain?

13.4% over 5 years suggests cash would have been a better refuge?

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William Bishop

Mar 10, 2016 at 16:42

The ECB has now pushed the boat out further, but it is unclear whether this will actually lead to any significant economic improvement for the eurozone, or only represents a further shifting of financial deckchairs without further-reaching consequences.

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Mar 11, 2016 at 08:48

Anonymous 1 - it sounds easy, but in practice this approach only works if you have near perfect market timing. Ruffer protected people against the carnage in 2008 - so they started off with a bigger pot once the markets began to recover. If you could predict accurately when to switch backwards and forwards between growth and absolute return investments you would be a very rich person!

In practice even the best fund managers have difficulty doing this on a regular basis.

The trouble with holding large amounts of cash for an extended period is that you will almost certainly lose money in real terms. As so often it comes down to the individual's risk profile and the length of time they can afford to leave the investment alone.

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Anonymous 1 needed this 'off the record'

Mar 11, 2016 at 10:20


its an interesting discussion.

The share price today is 200p and has fallen about 10% over the last few months so no better than some uk income trusts.

As a shareholder myself I am disappointed that with all their apparent wisdom they have not managed a better return.

Over the last 5 years they have returned 5.2% total compared to a defensive investment trust such as Edinburgh which has returned 87%.

I know market timing is difficult but I think many astute fund managers could see markets were overvalued last April and that the US raising rates would cause problems.I think there is a gap in the market for an equity income fund with flexibility to shelter some capital.

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Mar 11, 2016 at 10:44

Anonymous 1 - agreed. Personally I don't use Ruffer, but I recognise they came through 2008/9 in a much better condition than most other funds, including those in the same sector! In practice many absolute return funds have proved to be anything but.

Part of the problem these days is that there is a much higher correlation between different asset types than there used to be, so that there is a marked tendency for them to rise and fall together. Personally I have relied on a mixture of cash (but not too much!), commercial property, precious metals, strategic bond funds and a portfolio of retail bonds that I can hold from issuance to maturity, to damp the volatility on the larger equity holdings. So far so good....

I prefer ITs and ETFs to funds anyway, and apart from EDIN I also hold RIT and TMPL among my more conservative picks.

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Mar 11, 2016 at 18:19

I hold (OK, my wife holds!) Ruffer alongside Personal Assets and RIT in a section of her portfolio I've titled "conviction", as all are quirky multi-asset "wealth preservers". Of the three, Ruffer have performed by far the worse for us, but we haven't held through a full cycle yet.

As Ruffer have snoozed through the raging bull market, yet dropped with everything else when the markets wobbled, they are the first thing I'd sell if funds were needed.

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