Last year was tough for investors, with the majority of asset classes seeing steep falls as macro-economic and geo-politics worries came to a head from October onwards.
For some funds, market volatility and down years are par for the course. Investing in risk assets comes with the possibility of losing cash in the short term.
For others, though, it’s less than ideal. Absolute return funds, in particular, set their stall out to produce positive returns for investors year after year whatever the underlying market conditions. This is a high bar and one many have failed to achieve.
While the Morningstar Bronze-rated Ruffer Investment Company (RICA) is not an absolute return fund per se, its objectives are similar. It aims to achieve an annual return after expenses of at least twice the Bank of England base rate. Currently, that means it aims to generate a positive return of at least 1.5%.
By and large, it has achieved that. Ruffer has generated positive returns in nine of its 14 full calendar years of existence. Even at the depths of the financial crisis in 2008, when the FTSE All-Share lost almost a third of its value, Ruffer was up 23%.
As a result, for most of its life it has rarely traded on anything but a premium to net asset value (NAV). Its 10-year average premium is 2.48%. When it has slipped to a discount, it hasn’t been long until that was rectified.
Indeed, only for three periods has Ruffer’s discount been sustained: between October 2008 and January 2009; between June and December 2014; and between January and September 2016. In August 2014, the discount widened to more than 5% – the widest it had traded at prior to 2019.
Disappointing Performance
However, Ruffer’s fortunes dipped in 2018. At almost 6%, the NAV lost more than it ever has in any calendar year for the past 10 years. The share price followed, losing 11% – almost twice that of the NAV. As a result, Ruffer has been trading at a discount ever since December 22.
At one point in early January, that discount reached 7.34%, though it quickly narrowed to around 4%, where it has remained. Today, the discount is 3.86%.
“The high level of correlation between asset classes [in 2018] largely rendered allocation to risk-on and risk-off assets redundant,” says Morningstar analyst David Holder. “In this environment [Ruffer] failed to deliver an absolute return.
“Ruffer make the point that the portfolio is designed to protect against cliff edge falls of 15%+, but I have no doubt that Ruffer will be disappointed with the returns and it looks like some investors voted with their feet.”
Peter Hewitt has held Ruffer for more than five years in his BMO Managed Portfolio Growth (BMPG) as part of his protection to cushion potential downside from his more aggressive holdings like Scottish Mortgage (SMT), Polar Capital Technology (PCT) and Worldwide Healthcare (WWH).
In the protection bucket, which currently accounts for between 12-15% of his portfolio, he also has exposure to RIT Capital (RCP), Personal Assets (PNL), BH Macro (BHMG) and Capital Gearing (CGT).
“It’s not a perfect defence against a bear market – far from it. But, as we saw in the fourth quarter, when the market does go down, say, 10%, your Scottish Mortgage-type trust will go down by 15-20%.
“I wanted to try and cushion the blow of that. That’s the main reason for holding a Ruffer – it’s for defensive reasons.”
Ruffer is at the riskier end of this bucket, Hewitt explains. As a result, it was by far the worst performing of the quintet last year – the second worst, Personal Assets, lost 3%. That said, while it was clearly a disappointing year, and one management were hurt by, “in the grand scheme of things it wasn’t a disaster”.
Is Ruffer a Bargain?
Hewitt thinks last year’s poor performance was a stock selection issue. The equity portfolios of the likes of Personal Assets and Capital Gearing would be made up of conventional defensive stocks like Unilever (ULVR), Diageo (DGE) and British American Tobacco (BATS).
Hewitt says Ruffer thinks these stocks look expensive, so a lot of their UK and US holdings are more cyclical in nature. That decision probably cost them a few points of performance in 2018, as cyclicals didn’t do well amidst fears over global trade.
That trade may play to their advantage over the longer term, though. If we do hit a proper bear market, it could be hoped their stocks would be able to at least hold their value, if not outperform the wider market, as happened in 2008.
“If they get it wrong and the markets don’t fall substantially then hopefully their cyclical stocks should perform in a better environment because a lot of them are genuinely quite cheap,” adds Hewitt.
In addition to performance, Holder notes that the company has issued 3.6 million new shares over the past six months, so “there is clearly non-equilibrium in supply and demand”. Whether this is temporary or not remains to be seen.
Both Holder and Hewitt do feel the current discount offers investors a “reasonable entry point”. Further, continues Holder, as mentioned previously, periods of extended discount tend to be short lived.
Indeed, for investors looking for some defensive holdings, Ruffer has a great long-term record of preserving value and growing the NAV, says Hewitt.
As a comparison, RIT Capital, Personal Assets and Capital Gearing are trading on premiums of 8.38%, 0.94%, 0.47% and 2.73% respectively.
Holder adds: “I would view RICA as a hedge against substantial and extended periods of market weakness and down side volatility.”
As at January 31, Ruffer had around a third of its portfolio invested in equities, which is lower than ever before. Regionally, it has a decent slug in Japanese equities. Elsewhere, 42% of the fund is invested in index-linked bonds both in the UK and elsewhere.
One thing to be aware of, with Brexit uncertainty continuing to weigh on sentiment towards UK assets, is that Ruffer is currently heavily exposed to sterling – around 70-75% according to Hewitt.
As a result, should we get some kind of deal and sterling re-rates, a large chunk of Ruffer’s portfolio should do well. If, on the other hand, there’s a negative outcome to negotiations in the form of a no-deal Brexit then Ruffer would be impacted on the downside.
