FE Alpha Manager Steve Russell (pictured) and Hamish Baillie have had a good year, thanks largely to their overweight position in Japan, but are remaining vigilant about the major long-term risk of high inflation.
They believe the recent rally across risk assets is a result of the huge stimulus packages implemented by central banks rather than improving fundamentals, and say this policy will come back to haunt investors in the long-run. "The problem is that the world has become accustomed to artificially low interest rates, the promise of 'lower for longer' and a plethora of stimulus packages designed to prop up anaemic economic growth – $85bn of QE a month is now par for the course," they said in a recent note to investors.
"Many moons ago we wrote of the moral hazard in monetary policy where risk-takers were offered the protection of the Greenspan put or whatever assortment of goodies that might fall out of Dr Bernanke’s helicopter."
"A similar sequence of events is unfolding now and there are parallels with the years leading up to the credit crisis."
He says there are growing concerns surrounding QE among experts, but that they are falling on deaf ears.
"Last month a voice within the Fed, in the form of Jeremy Stein, warned that today’s monetary policy is encouraging excessive risk-taking and that at some point this will come back to bite us if not addressed," they explained.
"Many would add that this credit risk pales into insignificance when compared with the probability that central banks’ reckless behaviour results in a loss of confidence in paper currencies."
"This does not necessarily mean that we are on the verge of stumbling over the cliff but the risks are there and worth protecting against."
"We are happy not to participate fully in this liquidity binge if we are holding assets that will protect us from the inevitable hangover that follows."
The managers’ cautious stance – particularly with regard to inflation – is reflected in the make-up of the Ruffer Investment Company. According to FE data, they have 28 per cent in index-linked bonds and 11 per cent in gold and gold equities – areas that tend to do well during an inflationary environment.
They currently have 21 per cent of their portfolio in Japanese equities, making it their largest regional position.
They believe Japan will benefit from an inflationary environment as it will help to weaken the yen and improve competitiveness.
Russell and Baillie are also encouraged by political reform in the region and have high hopes for the performance of the market even before global inflation kicks in.
"Fundamental change in Japan continues apace – the appointment of a new governor of the Bank of Japan is imminent and the candidates for the role are supportive of Prime Minister Abe’s reflationary policies," they said.
"It is also significant that the US has not yet objected to the policy of weakening the yen and there was ample opportunity to do so at the G20 meeting."
"An improving Japanese economy will be helpful for the US and so this should not come as a surprise, but the lack of any objection leaves the door open for further action in Japan."
Performance of trust vs sector and index since launch
Source: FE Analytics
The Ruffer Investment Company’s defensive stance meant it underperformed its peers in the IT Global Growth sector in 2012, but its longer term record is still strong.
According to FE data, the trust is up 141.01 per cent since its launch in July 2004, beating its sector average with significantly less volatility and a far lower max drawdown.
Russell and Baillie do not use a benchmark, but by point of reference, the MSCI World index has returned 99.63 per cent.
The trust is up almost 10 per cent year-to-date – just a fraction behind its sector, which is dominated by pure equity portfolios.
The £300m Ruffer Investment Company has an ongoing charges figure of 1.16 per cent and is currently on a premium of 2.7 per cent. It is yielding 1.5 per cent.