This year’s market crash was entirely predictable, according to Ruffer chairman Jonathan Ruffer, who says anyone pinning the blame solely on the coronavirus pandemic is ignoring the risks that have been building in the market for the past decade.
As a group, Ruffer has long been positioned defensively in anticipation of a market collapse and its portfolios have held up well so far this year – for example, LF Ruffer Total Return is down just 2.03 per cent compared with losses of 13.11 per cent from the IA Mixed Investment 20-60% Shares sector and 25.13 per cent from the FTSE All Share.
Performance of fund vs sector and index in 2020
Source: FE Analytics
And the chairman accepted that while the coronavirus and its associated fallout were “utterly unforeseeable”, he said ignoring the condition of the market before the crash would be like investigating a maritime disaster without examining the ship.
“The Titanic was sunk by an iceberg; the Ark Royal by a torpedo – both were great surprises, as coronavirus has been,” he explained.
“Another way of looking at the fate of the Titanic and Ark Royal is that the former sank because of inadequate bulkheads, the latter because of a flaw in the siting of the engine exhausts.
“In the long run-up to market dislocation, we were preoccupied with the ship, not the icebergs or torpedoes. The instruments of destruction are always out there. If markets are resilient, they cope with them. The danger comes when they are not, and this has been the centre of our earnest enquiry: where were things going wrong? Where were they headed?”
Ruffer said this will be a far harder bear market to navigate than the dotcom bubble or financial crisis, when the market dropped by about 50 per cent each time.
Performance of index in dotcom bubble
Source: FE Analytics
In the first, he said all you had to do was ignore the tech and media stocks that were on obscene valuations, while in the second, you simply had to remember one rule: massive amounts of borrowing would eventually give way to massive amounts of de-gearing. As a result, he bought options on Swiss francs and Japanese yen on the expectation that investors who had borrowed in these currencies would compete to buy them back in the event of a crisis.
“As that bloody meerkat says, ‘simples’,” he added. “This time round, it is neither ‘simples’ nor ‘easies’.
“The problem can be condensed into a single idea – where there is borrowing, there is danger – but this does not come with an obvious solution.
“Leverage has flooded into every asset class. In the world’s portfolios, the most exposed positions have been the first to tumble. But as investors have struggled to re-establish an even keel, they have had to sell the things which are not obviously wrong, simply because these things are capable of being sold.
“This is not a surprise, of course, but it does mean that there has been, ahead of this rough water, a good reason for not owning any type of asset at all.
“In many ways, the battle has been less frightening than the eve of battle, when there seemed no certainties of safety.”
In a previous article published on Trustnet, Ruffer’s investment director Bertie Dannatt revealed how the group has managed to protect against this year’s crash, through long-volatility options, which Ruffer said have now run their course, and positions in credit spreads, which he believes still have plenty of mileage.
Less successful positions included a bet that the Japanese yen would outperform the dollar, and a tilt to value stocks in the equity side of the portfolio.
“Ironically, we believed that 2020 itself was going to be a year when world economies coordinated into a pattern of significant growth,” Ruffer explained.
Looking forward, he warned anyone who is tempted to buy the dips on cheaper valuations that this may not be the one-way bet they are banking on. While this has always been the right call since Alan Greenspan became chair of the Federal Reserve in 1987, the tactic produced mixed results before then.
“Not many of us old-timers who acquired our hard-wiring before 1987 are left,” Ruffer continued.
“I started as a stockbroker in 1972, when a falling stock market was friendless, and bad news was pretty much just that – bad.
“Buying the dips is predicated on the assumption that bad news is in fact good news since it opens up Uncle Sam’s pocketbook. Now debt is so great, and the promises needed so egregious, that there has to be a question mark over the efficacy of the pocketbook.”
Ruffer said that any loss of confidence in the value of the collateral will manifest itself in a fear of inflation. As a result, he has increased his position in inflation-linked bonds (notably in the US), which he said will protect against “a grinding bear market in money, in savings, in prosperity”.
“The time is moving on from a world where we had to protect against sudden shocks – catastrophe insurance is behind us, job done,” he continued.
“The investment landscape is going to become much more familiar, but it will only be a homecoming to the greybeards who have lived it before. Thirty-three years is a long detour – and for many it will have proved a cul-de-sac. It is difficult to master old tricks, second-hand, but my prediction is that it will prove a valuable quality over the next longish while.”