Ruffer’s punchy positions in inflation-focused assets have helped the trust sail past the FTSE All Share in October amid growing fears central banks were behind the curve in taming inflation.
Shares in the Ruffer Investment Company rose 5.4% last month, triple the FTSE All Share’s return of 1.8%. The trust’s net asset value increased 2.3%.
Portfolio managers Hamish Baillie and Duncan MacInnes said performance was driven by inflation-focused assets in the portfolio “particularly gold, energy companies and inflation-linked bonds”.
Long-dated index-linked gilts accounted for 12.6% of the portfolio at the end of October, while index-linked gilts made up 12.3% of total assets.
Baillie and MacInnes had 20.9% in UK equities, with oil majors Royal Dutch Shell and BP representing the two largest holdings at 2.8% and 2.7%.
Gold and gold equities made up 7% of the trust, with iShares Physical Gold and Kinross Gold both top 10 holdings.
Navigating inflationary landscape ‘will not be straightforward journey’
Echoing comments from the trust’s former manager Jonathan Ruffer, Baillie and MacInnes said it will be difficult to navigate markets in the coming months.
“While we expect inflation and real rate volatility to increase, it will not be a straightforward journey.”
Baillie and MacInnes said the monetary policy landscape is shifting. Short-dated government bond yields have spiked since the end of October over fears central banks were behind the curve in tackling inflation.
This has triggered some “extraordinary moves”, the pair said, forcing the Reserve Bank of Australia to abandon its yield curve control policy, the Bank of Canada to halt its quantitative easing programme and the Bank of England to consider a rate rise sooner than expected. Meanwhile the Federal Reserve has begun tapering its $120bn monthly bond purchasing programme and has dropped the word ‘transitory’ from its narrative.
“Until recently, the sure message was that inflation would wash out and no action was required,” they said.
See also: Jonathan Ruffer warns navigating markets will be like ‘sitting on an open Aga with bare buttocks’
Complacency in central bank omnipotence
“While Central Bank credibility is being threatened at the short end, perversely it seems that it is strengthening at the long-end of the yield curve,” the pair added.
“The expectation of near-term tightening is anchoring longer-term inflation expectations and long-term bond yields. Essentially the market is saying that despite lower credibility on their recent actions, central banks have the willpower and means to tame inflation. This emphasises the power and complacency of the belief in central bank omnipotence and underscores just how shocking it might be were that to change.”
This environment will “necessitate a nimble portfolio”, they said.
“Interest rate options have allowed us to manage the company’s duration this year – making money in bonds even as yields were rising. This flexibility will be useful going forwards.”
