Defensive diversification

Castle Defensive

Risk-averse investors often park their money in defensive funds with a commitment to focusing on capital preservation. And in that sector of the market, Ruffer Investment Company is one of the most widely-respected such vehicles, with a strong track record of performance even in difficult market conditions; this year, for example, the trust’s shares are 14.5% up on where they began 2020.

The investment company’s latest asset allocation decision may therefore come as something of a surprise. Its management team have just revealed they have moved 2.5% of the fund’s portfolio into the digital currency Bitcoin.

You didn’t hear that wrong. One of the investment company industry’s most admired funds has decided now is the time to take the plunge into an asset that has a remarkable history of volatility. Bitcoin investors have already been through several cycles of boom and bust – indeed, Ruffer is investing at a time when the digital currency has just broken through its all-time high.

The good news is that Ruffer’s managers have not taken leave of their senses. This is not a speculative investment aimed at delivering outperformance to investors if Bitcoin continues to hit new highs. Rather, it is an imaginative diversification strategy, hopefully providing protection in these turbulent and unprecedented times.

Bitcoin appears to have little or no correlation with other asset classes, Ruffer points out, an attribute that is difficult to secure from conventional financial assets. Moreover, the fund’s managers warn, in an era where the public finances of governments battling Covid are in such a mess, and with monetary policy now moving towards negative interest rates, there is every reason to fear a devaluation of the world’s major currencies.

In which case, a digital currency might well prove to be a fantastic hedge. And if other investors – including those institutions that have so far largely steered clear of Bitcoin – recognise that too, demand for this asset will only increase.

Ruffer is hardly throwing caution to the wind. Its investments in gold and inflation-linked bonds, also classic defensive plays, remain in place and are much larger than its new allocation to Bitcoin. And while a move into digital currency will surprise many analysts and investors, the managers’ excellent record of smart asset allocation decisions mean they are trusted. On top of its strong showing over 2020 overall, Ruffer was one of the most resilient investment companies during the height of the market uncertainty earlier this year.

The broader point here is that investment companies have greater freedom to be innovative in their approach to asset allocation, in both liquid and illiquid asset classes. Indeed, the sector has a proud history of steering investors into new asset classes that were once considered off-limits or unusual – examples range from infrastructure and private equity to social housing and music royalties, two areas where we have seen funds raise significant money in recent months.

The rights and wrongs of this particular asset allocation decision will become apparent at a later date. But for investors who want managers to take active charge of their money – which is why, after all, we pay them fees – this is the kind of move that makes the case for investment companies over other types of fund.