Ruffer admits ‘mistakes’ as it records worst year ever

Investors in Ruffer Investment Company suffered last year as equity markets rebounded and volatility dropped. 

Shares in the capital preservation trust, which was positioned for higher borrowing costs, stock market volatility and a stronger Japanese yen, dropped -10.6% in 2023. The net asset value (NAV) of the portfolio fell 6.2%.  

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This was the worst-ever year for the portfolio, narrowly topping 2018’s 6% NAV drop. Longer-term performance is stronger, with the annualised NAV total return since inception of the trust in 2004 at 7%, which is in line with UK equities, but behind global equities, albeit with a much lower level of volatility and drawdowns than both. 

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The fund managers said that at the start of 2023 they were very defensively positioned – but the problem was that so were other investors and a lot of the bad news was already in asset prices. 

Managers Duncan MacInnes and Jasmine Yeo said: “By far the most obvious reason to be bullish was that most investors were bearish. It isn’t often that we find ourselves positioned with the consensus, but at the start of 2023 our bearish positioning was not as contrarian as perhaps we thought.  

“Most other investors were also cautious. We underestimated the ability and willingness of market participants to re-risk and re-leverage their portfolios when recession and liquidity risks did not emerge.”  

Why did it perform poorly?  

Ruffer admitted that the portfolio endured a lot of pain over the past 12 months. The managers of the trust said: “We’ve made some mistakes, and a few times it has felt like things haven’t gone our way.” 

The largest cost to the portfolio were the credit protections detracting over 3% as, despite credit conditions tightening significantly, market borrowing costs fell – meaning assets held to guard against stress in the corporate bond market were not required. 

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The other main detractor was the Japanese yen, which Ruffer held in anticipation of the removal of the zero-interest rate policy in Japan, as well as for its protective characteristics in market crises, something which worked well for the trust 2008.  

The managers said: “However, in the absence of market stress and with continued dispersion between Bank of Japan and western central bank monetary policy, the yen weakened 12% versus sterling over the period, costing the portfolio 1.8%. The yen now sits at a multi-decade low on several valuation metrics.” 

How is the fund positioned today?  

The trust’s managers believe the full impact of higher rates presents a significant risk to markets.  

To prepare the portfolio for this, it is reducing risk in the portfolio and trimming its “duration”, which is a measure of how sensitive it is to changing interest rates. It has done this by selling all its inflation-linked US government bonds.  

“As a result, the portfolio’s duration has halved from its recent peak of around seven years in October. Alongside the bond sales, we have sold our remaining gold bullion exposure and rotated into what we see as cheaper expressions of duration, such as defensive, higher-yielding equities and additional exposure to the yen,” MacInnes and Yeo said.  

The portfolio has around 20% across equities and commodities, which the managers reckon should benefit from a broader market rally and further economic strength. Its fixed-income positions and gold equities should also rise in value if yields fall further, Ruffer expects.  

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“We have maintained the portfolio’s commodity exposure, expressed primarily through oil and copper exchange-traded commodity holdings, taking profits in the oil position in September.” 

In December, the trust added to its BP shares as a means of getting additional exposure to oil. Shares have been weak, while the company yields 5%.  

In November, it added more Chinese shares, where it says the government is under pressure to support the economy and markets.  

“We would expect this part of the portfolio to perform on any stimulus news or further surprises to the upside in growth,” MacInnes and Yeo said. 

Has the trust lost its touch?  

Numis, the stockbroker, says that while Ruffer Investment Company has an “impressive” long-term track record of delivering consistent growth with low volatility, recent performance has been challenging. 

“The nature of the portfolio means that the NAV will inevitably lag if equity markets remain strong, but the managers express caution over the direction of travel in 2024.” 

Numis says the managers expect inflation volatility to persist and are sceptical that the battle against inflation has been won. 

As such, it notes that they actively managing the portfolio to counter these risks, including selling inflation-linked US government bonds and gold, while also highlighting attractive opportunities in the UK and Japan, as well as commodities. 

Numis continues to believe that the trust is a good portfolio diversifier as Ruffer has an impressive record of insulating against market falls, most notably during 2022, Covid-19 and the global financial crisis.