This week my focus is on Ruffer Investment Company (RIC). It is a fund I hold but it is fair to say it has not been one of my most successful investments: the shares are off by about 4.5% year to date.
RIC aims to achieve a positive total return each year after expenses. It also aims to deliver a return at least twice that of the Bank of England base rate, so any fall in the share price is bad news.
Part of the fall can be accounted for by the fund shifting from trading at a small premium to trading at a 3% plus discount but the net asset value is also falling, by 1.3% in 2014 and 3.2% over the past 12 months.
RIC was launched in July 2004. Over 10 years the net asset value (NAV) has delivered a return of 143%, which, while in the third quartile for all Global investment companies, is ahead of the MSCI World index and well ahead of RIC’s benchmark.
More importantly, this has been achieved with NAV volatility less than half that of the index and the peer group. Against other global funds with absolute return objectives, RIC beats Capital Gearing and Personal Assets over 10 years, trounces the dismal Jupiter Second Split since the launch of that fund but lags Lindsell Train, which has been boosted by the success of the eponymous asset management company.
RIC was managed by Jonathan Ruffer and Steve Russell from launch until early 2012, when Ruffer stepped down to be replaced by Hamish Baillie. Baillie had been working with Ruffer since leaving university in 2002, and Ruffer is still chairman of the asset management company, so it is perhaps unsurprising there does not seem to have been any change in how the fund is managed.
I last talked in any detail about RIC when I wrote about cautious managed funds in March 2011. The NAV has risen since then – it is up by 14% over three years – but a large part of this has come from the long equity part of the portfolio, notably a successful bet on Japanese equities.
In 2011, the managers were convinced quantitative easing (QE) would inevitably lead to high inflation. To date, this view has been wrong, though they certainly were not alone in this assumption. The managers had 31% of their portfolio in index-linked bonds and 7% in gold investments in March 2011. Today, these numbers are 33% and 6%, which reinforces my belief that not much has changed since Baillie took over from Ruffer. This, the biggest bet in the portfolio then – and now – is yet to pay off in a meaningful way.
Although central banks created vast quantities of money through QE, for the most part this still sits on the balance sheets of the commercial banks.
Politicians moan about banks’ failure to lend, which is causing real problems for many small and medium-sized companies, but the banks have been told to shore up their balance sheets and this is what they are doing. If they start to lend again in any meaningful way, economies could surge back into life and this could ignite inflation but the central banks could react by accelerating the QE tapering process and, if this failed, raising rates.
On that analysis, soar-away inflation looks unlikely but QE is a new experiment and we cannot be sure its effects can be wholly contained. There is a feeling that it is driving asset prices higher at the margin but I think you need wage growth for widespread inflation to take hold, and the evidence currently is that wages are subdued.
The Ruffer team says central banks are now so worried about the prospect of deflation that they will keep their feet on the accelerator far longer than necessary, which may cause an inflationary overshoot. They even speculate there may be a political desire to see some inflation creep back into the system. For that reason, they are keeping their anti-inflationary bias within the portfolio.
RIC’s results for the year ended 30 June 2014 will probably not be published until next month but one thing that we can be fairly sure will be cited as a reason for the recent performance is the strength of sterling, particularly relative to the US dollar. About a quarter of the fund is denominated in US dollars and this position is unhedged.
The exchange rate moved from 1.52 to 1.71 over the year to end-June so this maybe knocked 2-3% off the NAV. The Ruffer team is convinced sterling looks vulnerable, however, and, so far in Ruffer’s new financial year, the exchange rate is moving in the right direction – it is closer to 1.67 today.
RIC traded at a premium for almost all of the past five years but the last few months have seen it slip to a discount. In the past, investors were presumably prepared to pay a premium for the inflation protection offered by RIC’s asset allocation. Does the discount indicate complacency about inflation today? In which case, might we be edging closer to a time when that inflation protection is needed? If I knew the answer I would tell you but my instinct is to stick with my RIC holding for now.
James Carthew is a director of Marten & Co