The Ruffer Investment Company could be an attractive option for investors who believe market conditions are likely to get increasingly difficult but are unwilling to use opaque defensive strategies such as hedge funds, analysts at Winterflood Securities argue.
The years since the financial crisis have seen both equity and bonds soar as investment sentiment improved on the back of unprecedented monetary easing by the world’s central banks and an improving macroeconomic outlook.
Performance of indices over 6yrs
Source: FE Analytics
However, some investors have become increasingly cautious over what the future holds as stock markets in the US and UK trade at record highs and bond yields remain at historical lows. Concern has especially centred on what will happen when central banks start to normalise their monetary policies and the liquidity that has kept the market afloat for the past six years starts to flow out of the system.
Against this backdrop, investors have increasingly been pulling money from funds, especially those focused on the UK, or – such as in the case of institutional investors – buying absolute return funds. Data from the Investment Association shows its IA Targeted Absolute sector has been the bestselling peer group among institutional investors for the past six months.
In his latest research note on the Ruffer Investment Company (RICA), Winterflood investment trust analyst Innes Urquhart highlights it as a potential holding of more cautious investors. 
“We consider it to be an alternative to funds such as Personal Assets or single manager hedge funds, such as BlueCrest All Blue,” he said.
“Certainly in the case of the latter, we believe that RICA is a more attractive option, due to its lower fees and far greater disclosure. However, the lack of a formal discount control mechanism means that investors are exposed to the potential for premium/discount volatility.”
The Ruffer Investment Company is managed by Hamish Baillie and Steve Russell, who take an absolute return approach to running the portfolio with a focus very much on capital preservation. It seeks to make a total return twice that of the Bank of England base rate, which is currently at a historic low of 0.5 per cent.
In their most recent investor update, the managers highlighted their concerns about the market backdrop: “Before 2008 economic growth came largely from credit growth, an era that ended with the credit crisis; since then growth has only been achieved via higher asset prices, which are entirely linked to the actions of central banks.”
“This puts central banks’ credibility at significant risk. They are charged with the twin and potentially contradictory aims of ‘getting the economy moving’ whilst also ‘maintaining financial stability’. The point is not that this is guaranteed to fail, but that the risk of serious damage to the credibility of central banks from any mishap is now very high, and if they lose their credibility who is there left to rescue the financial system?”
Given this view, Baillie and Russell ensure that the portfolio has exposure to “fear” investments, or those that guard investors against future risks. Assets that are intended to help the trust capitalise on available opportunities are considered to be “greed” investments.
Urquhart said: “Considerable thought goes into the construction of Ruffer Investment Company's portfolio and it is undoubtedly an attractive long‐term store of wealth.”
“Performance over recent years has lagged that of global equity markets, although this is to be expected given the managers' focus on absolute returns and it is comforting that the fund has historically performed well during difficult market conditions.”
Performance of trust vs sector and base rate since launch
Source: FE Analytics
The fund has underperformed its average peer by around 35 percentage points since launch, but it has returned significantly more than the Bank of England base rate.
Meanwhile, looking at the trust’s calendar year performance backs up Urquhart’s point about its track record in difficult years. While it has turned in fourth-quartile returns in bull market years like 2009, 2012 and 2013, things were very much different in the harsh down markets of 2008 and 2011.
When the eurozone debt crisis battered markets in 2011, RICA made a 2.80 per cent loss – which put it in the sector’s first quartile, following an average fall of 8.32 per cent by global trusts. Returns during the peak of the financial crisis in 2008 were more impressive, as the trust made a 23.01 per cent return while its average peer dropped 30.13 per cent.
When it comes to holdings, the trust’s portfolio is similar to Baillie and Russell’s open-ended CF Ruffer Total Return fund, although the investment trust is more concentrated and has greater exposure to some illiquid assets.
Ruffer Investment Company allocations as at 31 Mar 2015
Source: Ruffer
Given the managers’ view on monetary instability being one of the biggest risks facing investors, the trust has around 36 per cent of its assets in index‐linked bonds. They believe that a deflationary scare is needed if central banks are to start acting decisively rather than using temporary measures to support the economy and this environment would be supportive of long-dated linkers.
Around 20 per cent of the portfolio is in Japanese equities, as the managers have confidence in the long-term outlook for the country. Although they are wary of central bank intervention, they say the Bank of Japan has enough firepower to carry out additional stimulus, while they believe that corporate Japan is more likely to report upwards earnings revisions.
Gold also plays an important role in the portfolio, with 5 per cent of assets being invested in the yellow metal and its miners. While gold has been out of favour with investors for some time, Winterflood said: “In such a low (or even negative) interest rate environment the lack of income associated with gold is no longer considered such a significant disadvantage to ownership.”
Over the past year or so, the trust’s returns have been driven by its holdings in Japanese and eurozone equities, especially the former, and index-linked bonds. However, in their update Baillie and Russell offered a note of caution.
“Such sunny skies cannot be expected to last forever, and accordingly we have taken some profits in our equities and added to our protections against a back-up in bond yields,” they said. “How successful these measures will prove only time will tell, but true to form we are focused more on fear than greed.”
Ruffer Investment Company has a total expense ratio of 1.18 per cent, is not geared and yields 1.5 per cent. It is trading on a 0.3 per cent discount.
