Both funds were ready for the global financial crisis, and managed to come out of 2008 with a positive return in a year that the FTSE plunged by almost 30 per cent. This has inevitably made its mark on medium- to long-term performance, and both remain top-decile performers in their relevant IMA sectors over five and 10 years.
Performance of funds vs index over 10yrs
Source: FE Analytics
However, the positioning of both funds has seen them slip down the performance tables in recent times, particularly in the case of Trojan.
Both Lyon (pictured right) and Russell prioritise capital protection over anything else, and construct their portfolio in such a way that they are willing to underperform for sustained periods, as long as their investors are protected from worst-case scenarios. Both managers underperformed in the build-up to the financial crisis, but more than made up for this when Lehmans went through the floor.
At the moment, the pair have big concerns about inflation as a result of the unprecedented levels of liquidity being pumped into the markets via quantitative easing. They do not have a set time horizon for when inflation will become an issue, but are not taking any chances.
Both funds have significant exposure to gold, which has historically been seen as a natural inflation hedge, and inflation linked bonds, which make up 33 per cent of the Ruffer portfolio and 28 per cent of Trojan.
They are also pessimistic about the outlook for global growth and employment, which explains their high cash positions and equity underweights. Overall, CF Ruffer Total Return is slightly overweight equities, but this has much to do with its high-conviction position in Japan, which is in many ways a play on inflation itself, as Russell explained in an interview with FE Trustnet last year.
However, with QE set to be tapered in the US later this year and many global growth forecasts rising thanks largely to the recovery taking place in the US, these concerns look a little misplaced at the moment. Both gold and linkers have had a torrid time of late, and have contributed to patchy performance.
Performance of funds vs sectors over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Trojan |
-1.2 | 17.87 | 45.76 | 128.12 |
| IMA Flexible Investment |
14.34 | 21.26 | 20.53 | 97.43 |
| CF Ruffer - Total Return |
10.72 | 18 | 64.95 | 145.64 |
| IMA Mixed Investment 20%-60% Shrs | 9.37 | 17.32 | 22.3 | 64.63 |
Source: FE Analytics
The CF Ruffer Total Return fund is just ahead of its sector average over one and three years, putting it in the second quartile. Its overweight in gold and linkers has been offset by its 45 per cent exposure to equities, and notably its 16 per cent position in Japan, which has been the best-performing regional equity market of 2013.
However, Trojan is bottom quartile over both timeframes. Over the last 12 months it has lost money; at the same time, its IMA Flexible Investment sector has made 14.34 per cent.
Performance of funds vs sector over 1yr
Source: FE Analytics
In spite of the Fed’s "tapering" announcement, Russell (pictured) told FE Trustnet this week that he remains convinced that inflation remains the biggest single threat to investors.
So, are these managers past their sell-by-date? Should they be dropped from investors’ portfolios?
Not a bit of it, say experts Tim Cockerill and Adrian Lowcock, who believe funds of this type are ideal "insurance policies". "I see myself as quite a positive person and I’ve got a lot in equities which should help with inflation over the long-term, but I hold Trojan because I want something with a more negative outlook on things to keep me grounded," said Lowcock, senior investment manager at Hargreaves Lansdown.
"Everyone said that the effect of QE was always going to be inflation, but no-one ever said when, because it had never happened before."
"In my view, if you pump $3trn in to the world then it’s going to happen at some point. I don’t think it will happen until global growth improves and there is enough demand to see a lot of the money tied up to come out through trade and consumption."
"The problem is, once inflation is out of the bottle, it’s very hard to get it back in. These guys are there for insurance policies against this scenario, and the unforeseen events that come with it."
Cockerill himself disagrees with Lyon and Russell’s negative stance on inflation and thinks the Fed’s announcement could potentially be a turning point.
However, he says history shows that you should never put your eggs in one basket, and he rates both the Troy and Ruffer funds as an effective insurance policy as a result.
"The key question at the moment is: 'Are we at a tipping point for markets?" he said. "The Fed has made it clear that QE isn’t going to last forever, which we needed reminding of."
"Asset classes have been propped up by liquidity for the last five years, but now the taps are being turned off. For that reason, maybe these kinds of portfolios may need to change."
"That said, I can definitely understand the case for inflation. I don’t think QE is going to be turned off any time soon, and I suppose these guys think it will keep being used because of the idea that the only way governments can get rid of their debt is by inflating it away."
"QE should and probably will end up with inflation, though with China slowing and the demand for commodities on the decline, I can’t see it happening right now. The question of time horizon is a fascinating one – these guys could certainly end up being right, but you’re going to have to put up with the underperformance."
"The fact we’re in unknown territory, though, definitely makes the case for protecting against the possibility of inflation with an insurance policy."
Cockerill points to the fact that both CF Ruffer Total Return and Trojan are boutique funds, and have far more flexibility to take high-conviction positions – even if that means underperforming for three or even five years.
"This is pure investing, which is very valuable," he said. "These guys are following through with their conviction completely, which is what you want to see as it is quite rare."
"If you look back at history, these guys are often at odds with what the market is doing. They got the banking crisis right – that said, other managers also called that and didn’t do so well, so maybe you do have to question how much luck was involved with that."
"However, the evidence is in their favour. Their remit is to preserve capital, and their record says they have done a good job. If that’s what you want, who would bet against them again?"
I don’t know about you, but I certainly won’t be betting against either of them.
FE Trustnet recently met with Steve Russell and will be writing a series of articles next week on the manager’s outlook for markets.
