The economy of 2013 is closer to mid-market prosecco than the premier cru of pre-2007 but is nonetheless full of bubbles – and will still come with a hangover, Ruffer has warned.
In a relatively downbeat update on the Ruffer Investment Company, managers Steve Russell and Hamish Baillie (pictured) said their multi-asset strategy had lagged equity markets in 2013 but that they remained convinced that a large allocation to ‘safety’ assets would ultimately pay for itself.
‘So far [this year] we have produced an NAV total return of 9.6%, which is within touching distance of our long term average of 10.2% per annum since inception,’ they noted.
‘In a year when it has been comparatively easy to make money in risk assets, a plodding pace in line with what we have done for the last nine years does not seem like a boast. However, this year’s return has been achieved with less than half our money in equities, which have had to fight hard to make up for tomorrow’s insurance policies.’
Among the larger drags on performance have been inflation-linked bonds, as disinflation has spread across much of the developed world, tipping into outright deflation in some European states.
‘While a weaker yen is desirable for corporate Japan, one of the side effects of improved competitiveness is that it adds to the deflationary pressures in western economies.
‘The effects can be seen in inflation expectations, which remain subdued, and by extension there is less investor demand for inflation-protected assets. Despite this apathy we continue to believe that index-linked bonds have a valuable role to play in our asset allocation.’
Should inflation continue to decline, central banks would be forced to extend asset purchase programmes, with an ultimately inflationary impact, the managers argued.
The impact of rising risk asset prices remained real they added, but did not change the fact that current monetary policies were an extension of the too low for too long rates which caused the credit crunch.
‘Today’s world may not feel like the giddy heights of the pre-crisis era and perhaps prosecco is selling better than champagne, but this equity market rise is built on similar foundations to those which brought about the financial crisis – namely artificially low interest rates.
‘The less than cheerful festive message to our investors is that our protective investments, whilst out of favour, are as essential today as they ever have been.’