While Ruffer’s protective and diversifying assets cost investors again last month, the portfolio managers believe from weakening economic growth to dangerously sanguine markets, a tipping point looks to be close.

In particular, they heralded the Bank of Japan finally relaxing monetary policy as a major but overlooked shift, which should be positive for their ‘considerable’ yen exposure.

The returns of the firm’s flagship Ruffer Investment Company (RICA ) have proven a major disappointment this year, with net asset value (NAV) down slightly more than 7% versus the 8.3% gain for the MSCI AC World index and about half that for the FTSE.

The 11.2% drop for the listed fund’s shares has been worse, with the £1.1bn absolute return strategy currently trading on an unusual discount of 3.2%, according to broker Numis.

There was little respite for Ruffer investors last month with NAV ticking 0.1% lower, according to the latest factsheet, against solid gains for most equity markets.

‘Markets think a recession can be avoided because markets are going up,’ said fund managers Duncan MacInnes and Jasmine Yeo.

They characterised the Nasdaq’s 37% rise year-to-date as ‘performance to rival the dot.com boom’ as the consensus grows that a recession could be avoided while taming inflation.

In contrast, MacInnes and Yeo pointed to weakening economic fundamentals from reducing the availability of credit to ‘visible cracks’ in labour markets to manufacturing survey data ‘now in recessionary territory’.

‘We believe that both the economy and financial ecosystem are conditioned to low interest rates and are incapable of enduring interest rates in excess of 5%,’ said the pair.

The duo also run the £2.1bn Ruffer Diversified Return fund along similar lines, while the £3.1bn Ruffer Total Return portfolio lead-managed by Steve Russell has been a similarly weak performer.

Ruffer’s various portfolio diversifiers largely continued to misfire.

A global rise in real yields hurt inflation-linked bonds while derivative protections ‘were also a small drag’. Ruffer said that credit spreads had kept tightening and equity market put options – which benefit when indices fall – were becoming cheaper.  

‘Having cost the portfolio year to date, these protections are now highly attractive and, usually, tend to be most advantageous when nobody wants them,’ they added.

On the positive side, the managers said that had been offset by oil exposure, where a 14% return was generated in the month in response to Opec supply cuts. With the weighting to equities cut to historic lows, that oil exposure now represents ‘the biggest risk-on asset in the portfolio’, said the duo.

The oil price has continued rising in August, while European natural gas prices have also spiked this week, which should benefit select holdings such as BP.

The Ruffer managers also pointed to the Bank of Japan ending its yield curve control policy, designed to stop bond yields rising too much, at the end of July.

‘The news was met with a pop rather than a bang – the yen didn’t move much,’ said MacInnes and Yeo. ‘However, that pop was the starting pistol for something bigger.

‘We have considerable exposure to the yen, directly and via derivatives, and believe these positions have a long way to run.’

In terms of currency exposure, the Ruffer fund ended the month with a 16.1% allocation to the yen, though most of the fund is still hedged back to sterling with a 71.7% exposure.

Among the limited equity positions, curiously, Alibaba has moved up the top 10 to be the second-biggest stock holding at a 0.5% weighting. The Chinese tech company stands behind Taiwan Semiconductor, a 0.6% position.

Amazon also remains in the top 10. The managers said in half-year commentary that ‘modest allocations’ to the stock and Meta Platforms – which have both been central in driving the Nasdaq’s surge this year – had been ‘a small bright spot’.