Ruffer's MacInnes: The buy-and-hold era is over

Investors are entering a “new regime” in which they can no longer rely on a buy-and-hold approach to deliver real returns, according to Duncan MacInnes, manager of the Ruffer Investment Company.

MacInnes has long been concerned about high inflation, telling Trustnet in July 2020 that the market appeared to be blasé about the likely result of the enormous amount of fiscal stimulus that was used to keep the economy afloat during the coronavirus crisis.

He said ignoring it was no longer an option, now it was “punching us all in the face on a daily basis”.

“We definitely think we've moved into a new regime, where there will be more volatility in economic growth, more volatility in inflation and, therefore, more volatility in financial markets, and so that poses big problems for how investors deal with that.”

Yet he warned that many investors still appear to be clinging to a way of running money that only worked in a low-inflation environment.

For example, MacInnes warned last year that cross-asset correlations were going to increase, a prediction that has been proved correct following this year’s fall in both equities and bonds.

Performance of indices in 2022

Source: FE Analytics

As a result, he said the traditional 60/40 portfolio was “screwed” for the foreseeable future and urged portfolio managers to open their minds and consider real assets – such as commodities and gold – and even alternative assets, such as Bitcoin, shipping and music rights.

But he said the biggest “heresy” of all was his view that the buy-and-hold approach was no longer fit for purpose either.

“You're going to earn really low returns and they're going to be volatile: your Sharpe ratio is going to be terrible,” he continued.

“What you have to do is be more tactical and nimble and try to take advantage of that volatility: try to trade it a bit more than history tells you you should.

“We've all been schooled that buy and hold is the approach to use: ‘Don't over trade, don't try and time markets.’ But we think that actually, in the new regime, you may have to.”

Many fund managers disagreed with MacInnes’ hypothesis. In a recent article, Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said there were already signs that inflation may have peaked.

Meanwhile, Keith Ashworth-Lord, manager of the CFP SDL UK Buffettology fund, warned investors against chasing short-term performance in response to the changing macroenvironment.

“It’s a fact of life that people seeking short-term performance often get it, but at the expense of the long term,” he said, adding he wasn’t worried about the recent underperformance of the quality-growth stocks in his portfolio.

“If you've got a five-, 10-, or 20-year view, that’s a hell of a long hill to roll your snowball down. When you tend to look back on things, it's just a little blip on a chart.”

Yet MacInnes pointed out that not only has the Ruffer Investment Company made a positive real return in years when the market has been pummelled, it has also outperformed the FTSE All Share since inception in July 2004, with much lower volatility.

It has made 292.4% over this time, compared with gains of 258.9% from the index and 145.1% from the IT Flexible Investment sector.

Performance of trust vs sector and index since launch

Source: FE Analytics

Ruffer’s first fund in the Investment Association universe, LF Ruffer Equity & General, was launched in 1999. It has made 476.9% since then, compared with gains of 183.2% from the FTSE All Share and 161.7% from the IA Flexible Investment sector.

Performance of fund vs sector and index since launch

Source: FE Analytics

“There have been long periods of time where stocks have not necessarily delivered the high single-digit returns that everyone is taught by the textbooks they deliver,” MacInnes said.

“Your starting point matters a lot. And unfortunately, your starting point today is not a particularly good one. You're starting from very high valuations across global markets, and therefore low expected returns, and the economic outlook isn't fantastic either.”

He added: “If you look at the alternatives, Ruffer has outperformed equities since 1995, and we've done it with far less risk, far less volatility and more diversification. So it can be done. It's not easy, but there is the potential for a ‘have your cake and eat it’ type of strategy.”