Investors shouldn’t be selling the Ruffer Investment Company despite its poor run of performance, according to Charles Stanley Direct’s Rob Morgan, who says the investment trust remains a “strong” option for cautious investors seeking portfolio diversification. 
The closed-ended fund, which is run by Hamish Baillie and FE Alpha Manager Steve Russell and invests across multiple asset classes, has gained many followers over the years thanks to its decent longer term track record and past ability to protect investors during painful market falls.
As such, the trust has largely traded on a premium to NAV over years as investors have jumped at the chance to hold a closed-ended fund that can shield them from general market volatility.
Ruffer Investment Company’s absolute discount/premium
Source: FE Analytics
However, as the graph above shows, that trend has started to reverse somewhat over recent years. Data from the Association of Investment Companies shows Ruffer is now on a slight discount to NAV, while its shares had traded on a 3.55 per cent premium over the past 12 months.
Morgan, pensions and investment analyst at the group, says this discount widening is due to lacklustre NAV returns over recent years which have been generated by Baillie and Russell’s (so far incorrect) macro views.
However, though some have clearly decided to dump its shares, he says investors in the trust now would be wrong to follow suit.
“In our view, this remains a strong, macro-economically driven trust that could provide useful diversification in a portfolio,” Morgan (pictured) said.
“The managers have a high level of flexibility in their aim to preserve and grow capital, though in the shorter term relative performance is likely to driven by the significant weightings to Japanese equities and index-linked bonds.”
Nevertheless, it is clear that Ruffer’s recent performance has been unusual in what has been a volatile market.
According to FE Analytics, Ruffer Investment Company is down 5.68 per cent over 12 months compared to a slight gain from the IT Flexible Investment sector average. That means the trust is also in negative territory over three years while the peer group has returned 8.83 per cent.
Performance of fund versus sector and index over 3yrs
Source: FE Analytics
Morgan says these losses have been down to portfolio positioning that hasn’t been in-keeping with general market sentiment.
“The long-term performance of the trust has been consistent overall, with a particularly strong period in 2008 when the trust rose strongly as most markets fell,” he said.
“However, having managed to largely keep up with equities in the following three years, it has lagged since 2011. Indeed the past year in particular has been disappointing, largely down to the decision to reduce equity exposure in strong-performing areas such as the US, but to retain a large weighting to Japan.”
Baillie and Russell have long deemed Japan to be the most attractive region for equities thanks to the impact of prime minister Shinzo Abe’s reforms and significant stimulus packages from the Bank of Japan – despite the fact they feel most central bank interventions around the developed world have done little but distort markets.
Though this was originally a good call, concerns that ‘Abenomics’ is losing its effectiveness has meant Japanese equities have struggled over recent times. FE data shows the MSCI Japan index is underperforming global equities over the past 12 months, for example.
Performance of indices over 1yr
Source: FE Analytics
The Ruffer managers have admitted their frustrations at recent developments in Japan, but are sticking to their exposure.
“Bank of Japan governor Kuroda must feel he is ‘damned if you do, damned if you don’t’ whichever way he turns,” Baillie and Russell said.
“His imposition of negative interest rates earlier this year received a resounding thumbs down from markets (equities down, yen up) so in response he sat on his hands in April, only to find his inaction greeted by the same negative reaction.”
“This has tested our resolve on Japan, having seen some of our gains made there in previous years swiftly taken back. However, we believe the Japan story is still taking shape and such missteps as we have seen recently will merely hasten the path to more reflationary fiscal intervention.”
Of course, Ruffer only has 38 per cent exposure to equities (half of which is in Japan). The rest of the portfolio is split across index-linked bonds, gold and cash – which is a reflection of the managers’ ‘big picture’ views.
“While equity performance within the fund has been disappointing, this has been offset by gains in other areas, notably index-linked bonds and gold holdings, which have been purchased to benefit from any increase in inflation expectations,” Morgan said.
“The managers believe that inflation linked-bonds (currently just over 40 per cent of the portfolio) will ultimately provide safety, though they are conscious they could easily be volatile in the shorter term, tested by the possibility of deflation before the team’s thesis of longer term inflation resulting from extraordinary monetary policy takes hold.
He added: “Gold and gold equities account for around 7 per cent of the trust’s assets.”
As mentioned earlier, this macro-driven cautious multi asset approach has worked well over the longer term.
Since its launch in July 2004, Ruffer Investment Company has returned 142.61 per cent, more than doubling the returns of the IT Flexible Investment sector in the process. As a point of comparison, it has also beaten the FTSE All Share over that time with a third of the volatility and maximum drawdown.
Performance of trust versus sector and index since launch
Source: FE Analytics
Its outperformance has tended to come in falling markets such as its 23 per cent return in the crash year of 2008.
As such, Investment Trust Intelligence says that though Ruffer has struggled recently, it is a decent hedge against general market risk.
“Performance tends to be somewhat muted during positive markets, but the trust comes into its own when things are on a downward track, which could make it an interesting option in 2016, if the birds come home to roost,” the report said.
Ruffer Investment Company is not geared, has a dividend yield of 1.7 per cent and ongoing charges of 1.13 per cent.
