Wealth preservation fund Ruffer (RICA ) investment company has slashed its holdings in equities, or shares, to 25% down from 40% a year ago, the lowest level in 19 years as manager Duncan MacInnes warns investors the bear market is ‘mid-grizzle’ and stocks aren’t a buying opportunity yet.

MacInnes, who last week became the £969m multi-asset portfolio’s lead fund manager after Hamish Baillie announced his departure from the Ruffer partnership after two decades, said there had been ‘nowhere to hide in conventional assets’ in a grim first half of 2022 when both bond and equity markets slumped in response to inflation, rising interest rates and the war in Ukraine.

In his annual investment review MacInnes said the global closed-end fund had ‘achieved its objective of preserving and growing shareholder capital’ over the year to 30 June, delivering a 5.6% rise in net asset value (NAV) while the share price moved 5.9% higher.

In the first six months of this year it eked out a 3% underlying total return including dividends, compared to the 4.6% fall in the FTSE All-Share. In 16 of the previous 18 calendar years, the company generated positive returns on net assets: 2018 was its worst year, down 6% when the UK stock market lost 9.5%, offset by its famous 23.8% gain in the 2008 financial crisis when the All-Share crashed 30%. 

As of yesterday, the latest data shows a 10-year shareholder return of 68%, below the UK’s stock market 93% return, but with far less volatility. That defensive performance has kept the shares on a 3% premium and enabled the company to raise £237m in the first half.

‘Crouch mode’

MacInnes said it was ‘no surprise’ that the portfolio’s ‘unconventional protective assets’ in interest rate and equity derivatives had driven the positive performance of the past year with a 7% total return, when its ‘crown jewels’ in long-dated inflation-linked government bonds had slumped up to 51% since November. 

By the end of June RICA held over 7% in Ruffer Protection Strategies , an open-ended fund, and 10.7% in Ruffer Illiquid Multi Strategies , a Guernsey-closed-end fund, which are designed to rise in falling markets.

The manager, who also helps run the similarly positioned open-ended LF Ruffer Diversified Returns fund, explained he had cut risk further and moved RICA into ‘crouch mode’ to deal with ‘what we believe will be a particularly dangerous period in the second half of this year’.

In addition to lowering equities, he had instituted hedges to further minimise the risk of further stock market falls, lengthened the ‘duration’ of the portfolio to maximise the effectiveness of its defence against inflation and switched gold holdings from mining companies to bullion.

Although the ‘carnage’ in long-dated index-linked bonds had knocked 6% from RICA’s returns, MacInnes (pictured) said their sensitivity to rising rates had been expected and did not diminish his conviction that they would protect investors from a long period of episodic, but higher inflation. 

‘This illustrates a distinction we have been labouring; investing for inflation and investing for inflation volatility are not the same thing and conflating the two will be costly,’ he said.

Gold, which cost the portfolio 0.9% in lost returns over the year, was a ‘prime example of the failure of conventional safe havens in recent times’ as it had ‘misfired’ and failed to protect against the instabilities of war and inflation. 

‘We still think it has a valuable role to play, but this greater correlation with risk assets is a consequence of gold’s increased financialisation,’ said MacInnes.

Energy profits

While shares generally weighed on returns, MacInnes was able to take profits on energy companies as oil and gas prices soared, adding 2.8% to performance as he cut the sector weighting from 7% to 4%.

The tumult in the global economy and markets witnessed this year means MacInnes has ‘never had higher conviction’ that conventional equity and bond portfolios were ‘not going to fare well’.

Cautioning that the ‘bear is only mid-grizzle’, MacInnes reminded investors that the influential Federal Reserve was tightening US monetary policy into an economic slowdown, and that while valuations had fallen to more reasonable levels, they were based on unrealistic forecasts of company profits.

Moreover, the evidence from surveys of weak consumer and business leader confidence suggested a recession was on the cards, a prospect that markets had not fully reflected.

‘So far we have seen limited signs of capitulation,’ with money continuing to flow into equities and credits during the selloff. The ‘buy-the-dip’ mentality was alive and well, he said, but that was a mistake as having suffered a steep drop, markets faced the prospect of a more prolonged grind lower over the next few years as rising interest rates, but negative real returns after inflation, eventually forced ‘a recession, a market crisis, or both’.

‘How does an asset fall 95% in value? First it falls by 90% and then it halves!’ he quipped.

‘Underrated’ cash

While investors have got used to central banks and governments stepping in to support markets with monetary and fiscal stimulus, MacInnes said this time was different.

‘Given the need to dampen demand to tame inflation, the market upside is capped; rise too much and it will be met with more hikes and tighter financial conditions. The US Federal Reserve wants higher risk premiums, and that means a lower market,’ he said.

MacInnes, who held 10.5% of RICA in cash at the end of June, described the allocation as ‘an underrated decision’.

‘It provides the certainty of a slow erosion by inflation, but it also gives you the option value of being able to move quickly,’ he said.

‘There are times for a get-rich portfolio and times for a stay-rich portfolio. We believe this is the latter. There will be better moments and better prices in the future,’ he concluded.