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Ruffer expresses ‘considerable regret’ at 5% capital loss

8 March 2019

Ruffer Investment Company apologises for sharp drop in the defensive global trust's assets last year, a fall that damages its reputation for capital preservation.

Ruffer Investment Company (RICA) has apologised for a sharp drop in net asset value in the second half of last year, a fall that has damaged the investment trust’s reputation for capital preservation.

Ruffer, which shot to prominence by actually making money for its shareholders in the 2008 financial crisis, when the vast majority of funds suffered huge falls, saw its NAV slide 5.1% in the six months to 31 December.

While not a big decline in absolute terms, and less than the falls in most major stock markets, it runs counter to the defensive, multi-asset trust’s aim of protecting shareholders’ capital whatever market conditions.

Following its success in the credit crunch, many investors put Ruffer at the core of their portfolios. However, after subdued returns in the previous two years, the downwards lurch in the last six months of the year knocked investors’ confidence in the £381 million fund and Ruffer shares fell 10%. The stock ended its half-year period trading at its first significant discount since 2016.

Chairman Ashe Windham described the performance as ‘disappointing – we have failed to achieve our objective by some margin and this is a matter of considerable regret.’

Fund managers Hamish Baillie, Steve Russell and Duncan MacInnes also apologised, saying they should have done better even though a Deutsche Bank study had shown 90% of asset classes had fallen in dollar terms last year.

‘For many managers adverse market conditions can be put forward as an excuse for posting a loss, but we pride ourselves in taking on responsibility to perform in both good times and bad.

‘Investors have given us flexibility as to where to invest their funds and so there should be no excuses,’ they said.

Although equities only accounted for just over a third of the portfolio, its lowest level since 2008, Ruffer had most of this in shares in cheaper, unloved ‘cyclical’ companies and financials exposed to the economy. These did badly as investors took the view that the global economy was slowing and corporate profits falling, knocking 3.7% from NAV.

For example, a 0.4% position in Dixons Carphone (DC) was a big detractor after shares in the UK electronics retailer tumbled 30% due to the upheaval caused by new management combined with the ‘brutal sentiment’ towards retailers. However, Ruffer’s managers still believed it was ‘robust enough to be the last man standing’.

‘We continue to have conviction that the company’s equities are capable of delivering powerful returns should the market regain composure as both earnings and valuation multiples rise,’ they added.

Windham, who in response to a recent change in the investment company code of governance is remaining as chairman for a few more years, having served for a decade, explained the portfolio was designed to protect investors from financial storms and market falls of 15% or more, rather than the ‘heavy showers’ it endured.

‘In 2018 we experienced a couple of serious downpours – in February and November/December when our protective or “fear” investments started to work but failed to fully offset the damage done to our “greed” assets,’ he said.

Trades and switches

The most successful holding was a 6% position the Ruffer Illiquid Multi-Strategy 2015 fund. This trades in specialist credit and volatility instruments designed to do well when markets are floundering. It shot up 30% in the fourth quarter, adding 0.3% to Ruffer’s NAV.

The Ruffer managers did what they could to stem the losses, selling Apple (APPL.O) and locking in a 100% gain when the shares stood at $220 before falling to $146. Similarly, Israeli US-listed cyber security business Check Point Software (CHKP.O) was sold for a gain of 46%.

Reducing the trust’s holding in Katie Potts’ open-ended technology fund Herald Worldwide also locked in a gain of 345%.

The managers continued to back Japan as one of the best markets in which to take equity risk due to valuations and ongoing corporate reforms. This was highlighted by its holding in real estate company NTT Urban (8933.T) which was bid for at a 30% premium.

They upped the trust’s weighting to gold from 5% to 8% over the six months, rotating from exposure via physical bullion to shares in gold mining companies that now make up 7% of the fund. This was in anticipation of increased corporate activity, subsequently borne out by Randgold Resources merging with Barrick (GOLD.N).

They also used lifted holdings in US index-linked government bonds, or ‘Tips’, by 10% to 28%, after they also looked cheap after a series of four interest rates rises by the Federal Reserve. After inflation these ‘offer a positive real yield in arguably one of the safest assets in the world,’ they said.

Ruffer’s founder, Jonathan Ruffer, has regularly warned in the past three years that the next crisis will offer ‘no hiding place’ after all assets were inflated by a long period of ultra-low interest rates. The trio in charge of the trust believe they are as well positioned as they can be.

‘It is encouraging that towards the end of the year, when the sell-off in markets intensified, our protective assets started to kick in. A deterioration in markets from here should see the company perform well,’ they said.

Investment company news brought to you by Citywire Financial Publishers Limited.


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