Ruffer enters ‘crouch mode’ and slashes equity exposure ahead of ‘dangerous’ H2

‘We do not think this is a good environment to be risking our shareholders’ capital’

Duncan MacInnes Investment Director Ruffer

Ruffer Investment Company (Rica) is slashing its equities exposure and de-risking in preparation for a “dangerous” second half of the year.

The £947.6m investment company ended the year to 30 June 2022 in positive territory, with its share price up 5.6% and net asset value 5.9% higher. This was better than the FTSE All Share, which rose 1.6% over the period.

This is Rica’s last set of annual results before longstanding manager Hamish Baillie bows out later this month after 20 years at Jonathan Ruffer’s eponymous boutique.

Duncan MacInnes (pictured) will continue to run the investment company with support from Ruffer’s wider investment team.

‘Crouch mode’

Reflecting on the year, MacInnes and Baillie said performance was driven by the closed-ended fund’s “unconventional toolkit”. Options contributed 3.7% of positive performance and its holding in the Ruffer Illiquid Multi-Strategies fund added 3.3%.

Its bundle of energy stocks – including BP, Shell and Exxon Mobil – was the second biggest contributor, adding 2.8% to performance. MacInnes and Baillie had a 7% allocation to these stocks in the summer of 2021 but, by the end of the period, that had fallen to 4%.

The pair has been de-risking the portfolio and moving into “crouch mode” in anticipation of “a particularly dangerous period in the second half of this year”.

Equity exposure now stands at 25%, the lowest for Ruffer portfolios since 2003. Elsewhere, the team has been upping portfolio duration and rotating their gold exposure from equities to bullion.

“We do not think this is a good environment to be risking our shareholders’ capital. Rather, we see the coming months as a period to survive, given the extent of the uncertainty around the Ukraine war, central bank policy, inflation, corporate earnings and the consequences of rising interest rates.”

Rica currently has over 10% in cash, which MacInnes and Baillie describe as an “underrated decision” in the current environment.

“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.”

Ketchup inflation

Over the long term, MacInnes and Baillie believe markets are entering “a new regime of inflation volatility”, one in which the conventional 60/40 portfolios will fall flat.

“The great moderation of inflation, growth and geopolitics enjoyed over the last 40 years is over,” they said. “Having spent a decade trying in vain to create inflation, like an impatient child slapping on a ketchup bottle, central bankers have now got too much, all at once, in an uncontrolled splat.”

Inflation-linked bonds made up nearly 24% of Rica at the end of the period, accounting for most of its 36% exposure to government bonds. These hedges cost the portfolio 3.5% in its latest financial year, with the longest dated 2073 issue down 51%.

However, MacInnes and Baillie stress they are the “crown jewels” that should provide “the perfect protection in the world of financial repression we are entering”.

“Investing for inflation and investing for inflation volatility are not the same thing and conflating the two will be costly,” they said.

“Mr Market will make us crawl through fire for the gift of redemption, and derivative protection via the unconventional toolkit remains essential to safely navigating choppy and dangerous markets. Inflation-linked bonds are now back to pre-Brexit prices – and yet, in our assessment, the likelihood and proximity of the inflationary denouement is much greater.”

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