In a typically frank monthly update the Ruffer team admitted it is unsure its fund can deal with the troubles that lie ahead.
The update marked the final month for Ruffer chairman Jonathan Ruffer (pictured) on the front line of the Citywire Selection Ruffer Investment Company (RIC) in a move which had been flagged at the end of last year.
While he has stepped back from direct involvement in the management of investments he will continue to furnish the team, which comprises Hamish Baillie and Steve Russell, with his macro thoughts.
Ruffer steps back from the £278.5 million trust - which sees capital preservation as its primary raison d’etre – at an uncertain time. ‘On the face of it our job is a straightforward one; keep investors capital safe as a primary objective and produce a return of at least twice Bank of England Bank Rate,’ Baillie and Russell said.
‘Unfortunately, the drawback of obsessing over capital preservation is that there is always something to worry about. Knowing that it is unlikely in the extreme that we will consistently call markets correctly in the longer run, our answer has always been to build up a panoply of investments which will offset each other.’
One of the biggest challenges facing Ruffer is making sure there is not too much correlation in the portfolio. In these exceptional times it admits that correlation within the portfolio is ‘dangerous’, putting its capital preservation philosophy under threat.
This is a big dilemma for all asset allocators at the moment. Sebastian Lyon, manager the Citywire Selection Trojan fund, recently compared himself to the jockey from the 1970s Hamlet advert in his bid to preserve capital.
As a consequence, the Ruffer team is not entirely comfortable with the positioning of their fund.
‘Are we therefore comfortable that the positioning of the portfolio can deal with what lies ahead?
'Absolutely not – there are large (and well identified) risks to equity markets in the form of Europe, China and geopolitical tensions in the Middle East and a large part of our offset is in inflation protected bonds at a time when central banks are talking about reducing stimulus and inflation is by-and-large falling (but is still well above target).'
Central bank policy is also causing Ruffer some concern in an investment landscape it describes as being ‘more complicated’ than last year. While its index linkers have provided its portfolio with protection despite there being no evidence of a general rise in inflationary worries, Ruffer is still very conscious of the deflationary threat.
‘We are faced with powerful deflationary forces brought about by the financial crisis and hence the effects of deleveraging and austerity, but all the world’s major central banks have chosen to fight this battle with their own inflationary forces – liquidity injections, ultra-low interest rates and money printing,’ Baillie and Russell said.
‘Recently, central bankers have been in the ascendency not least through the European LTRO (long-term refinancing) operation, but the patient still appears to be dependent on the life support and, with any hint at that support being removed, the market gets the jitters.’
However, ultimately the pair believe central banks will continue to pump money into the system to avert deflation.
'[However] what we know is that the deflationary forces are a finite thing (how much can the economy contract?) whereas the troops at the disposal of central banks are infinite and will persevere as long as they continue to be deployed.'
Over the last 12 months RIC has been successful in its mission, returning 3.3% versus a 0.44% rise in the FTSE World index. The trust is currently on a 3.9% premium.