Protectionist Ruffer sets out stall as antithesis of ‘wildly bullish’ stock market
Wealth preservation trust Ruffer Investment Company (RICA ) is positioning itself as the ‘antithesis’ of current market excess, a stance that its managers argue prime it for recovery after ‘two painful years’.
The nearly £1bn trust has suffered in the face of strong equity markets over recent years, as managers Duncan MacInnes and Jasmine Yeo remained defensively positioned despite increasing their equity exposure from 17% to 30% in 2024.
Over the 12-month period, the net asset value (NAV) was broadly flat and the shares dipped 0.7%, far short of the 9.4% gain enjoyed by the FTSE All-Share somtimes used as a comparator.
Ruffer’s open-ended strategies, such as the £1.7bn Total Return fund, are similarly positioned and have likewise delivered lacklustre recent performance.
The biggest drag on RICA’s performance was the equity downside protections the managers had put in place, such as index puts and VIX calls on volatility, which fell as markets rose and volatility remained largely subdued.
‘The credit protections were also costly, to the tune of -0.8% as credit spreads narrowed and market borrowing costs fell,’ said the duo, in a review of 2024.
The increased equity positioning helped to offset the losses as the fund racked up a number of stock market winners, particularly in Asia ex-Japan holdings, including China A shares, which delivered almost half of equity upside.
E-commerce giant Alibaba and semiconductor group TSMC were the biggest winners, and a ‘small but concentrated allocation to some US names’, including Amazon and Citigroup, delivered strong returns.
In the UK, British American Tobacco (BATS) and Rolls-Royce (RR) also enjoyed increases, as did Ruffer’s basket of investment companies, including Aberforth Smaller Companies (ASL ), PRS Reit (PRSR ), Taylor Maritime (TMI ) and Tufton Oceanic Assets (SHIP ).
Gold was also a top-performing asset, with Ruffer having a 5% allocation to gold mining companies, as well as a ‘tactical allocation to silver bullion [which] allowed us to benefit form the unusual rise in the metal as yields remained high’.
MacInnes and Yeo made efforts to better balance the portfolio last year ‘given imbalance was a key source of frustration in 2023’, mixing a larger exposure to equities with its stalwart protective assets such as index-linked bonds, the yen, and protection strategies.
‘Our protective assets…have overall been detractors, despite having been invaluable during the market tremors,’ they said.
The protection assets may once again come into their own this year, as MacInnes and Yeo warned that in the short-term ‘investor positioning is yet to adjust to reflect a higher cost of money’ as bond yields continue to surge, valuations sit at ‘extreme levels’, sentiment in the market is ‘wildly bullish’, and a new presidential regime in the US looks set to complicate the outlook.
There are three scenarios that the managers are predicting could happen: the US rally continues and Ruffer will not perform strongly but will offset the cost of protection with equity rises; there is a significant market sell-off on higher bond yields, reaccelerating inflation and undercutting lofty valuations, where the protective assets would come into play; and a rotation within markets, where previously overlooked shares would start garnering more attention.
This would create volatility and therefore ‘tactical opportunities’ and the push into unloved stocks would benefit Ruffer’s ‘ugly ducklings’.
‘It has been a painful two years for Ruffer, but we think that the prospective rewards for having a portfolio deliberately positioned as the antithesis of all the excess we see in financial markets will fully reward our shareholders’ patience,’ said the managers.