Although issues surrounding the Cypriot banking crisis did cause a short-term sell-off in equity markets in late March, the FTSE recovered after just a few days as policy-makers decided on an 11th-hour bailout.
However, FE Alpha Manager Steve Russell (pictured) and Hamish Baillie believe the controversy proves the fundamental problems with Europe have not gone away, and the pair are protecting investors against a worst-case scenario as a result.
"The bitter chill of an unseasonably cold March seemed to numb the minds of European policymakers, who showed their ability once again to squeeze a pair of size-10 snow shoes into their mouths," they said in a recent note to investors. "In the grander scheme of things, Cyprus is likely to prove to be a minor bump in the road for global investors, but it has demonstrated how closely we are tiptoeing around the edge of a banking crisis in Europe."
"Just when it appeared as though policymakers had got the hang of how to deal with failing banks – through the pain-deferral methods of artificially low interest rates and bailouts – they chose to test markets and the patience of depositors."
"By threatening to shoot a hostage by making an example of Cyprus, the infamous troika has opened up more than one can of worms."
Baillie and Russell highlight three major reasons why the Cypriot affair has raised concerns over the stability of the eurozone.
"Firstly it has brought into question the inviolability of cash deposits and raised the possibility of the expropriation of private assets."
"Secondly, the introduction of capital controls flies against the ideology of the single currency. In the next chapter of the eurozone crisis all eyes will be on the safety of deposits and a flight of capital from a teetering country could become self-fulfilling."
"The third risk is that once again the elite of the European political establishment was forced to back down and this time not by the comparative giant of Spain or Greece, but by a minnow. This will make future troubled economies bolder in the face of troika-induced austerity."
The managers say these risks justify the defensive positioning of Ruffer Investment Company, which was launched in July 2004.
According to FE Analytics, the trust is the third-best performing portfolio in the IT Global Growth sector over five years, with returns of 88.07 per cent.
The trust does not have a specified benchmark, but as a point of reference the FTSE All Share has returned 29.99 per cent over this time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Unlike the majority of investment trusts, Ruffer Investment Company holds fixed income assets, with just under 30 per cent of the portfolio in bonds.
In terms of equities, Baillie and Russell’s largest regional exposure is to Japan – making up 20 per cent of the trust’s £320m in assets under management (AUM).
The duo are much more concerned about the UK and are wary of the long-term implications of the chancellor’s most recent Budget.
"The other significant event last month was the UK Budget. These days’ Budgets rarely spring surprises and the political theatre trumps the economic impact, but there were some notable developments," they said.
"The incoming governor of the Bank of England will have greater flexibility in his mandate and the Monetary Policy Committee is fast becoming an arm of politics. Does this matter? It may not matter now but it will do when an unpopular rise in interest rates is required."
"Secondly, the Help to Buy scheme is notable for its similarities with the reckless lending practices that landed us in this mess in the first place."
"Encouraging capital-light real estate purchases will provide a short-term boost to the construction industry, but it does not feel like a long-term solution to the feeble rate of economic growth."
"Against this backdrop we have been taking some profits in our equities outside Japan while keeping the portfolio’s protective positions in place," they added.
Ruffer Investment Company is currently trading on a 4.6 per cent premium to its NAV, and does not use gearing. The trust has an annual management fee of 1 per cent and does not have a performance fee.