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Jonathan Ruffer: We are fearful of being entirely right

16 July 2018

The chairman of Ruffer Investment Management explains why he tries to avoid forecasting the future and instead focuses on ‘not being wrong’.

By Rob Langston,

News editor, FE Trustnet

Remaining focused on investment objectives and tempering natural contrarian instincts have been key to delivering performance across the Ruffer Investment Management portfolios, according to chairman Jonathan Ruffer.

The investment veteran said his firm – where the range includes the £3.3bn LF Ruffer Total Return and five FE Crown-rated LF Ruffer Gold funds – avoids trying to call future events correctly and focuses instead on not being wrong.

“If you have the possibility to shoot the lights out by being right, you retain the possibility of shooting yourself in the foot if you are wrong,” he said.

“So, our ambition is to be ‘not wrong’. The reason for this is that if we put clients’ money at risk, and we avoid losing money, the inherent volatility of the risk taken will ensure that, as an indirect consequence, the value of the portfolio will almost certainly rise over that period.”

Ruffer said that the desire never to lose money is of “exactly the same speculative nature” as the desire to always outperform the benchmark.

“Nobody expects a consistent outperformance, year-by-year, of the indices, but some investors achieve it sufficiently often, and by a sufficiently high margin, to validate ‘beating the indices’ as an effective target to investors,” he explained.

Annual performance of MSCI World in USD over 25yrs

 

Source: FE Analytics

Ruffer said one of the challenges for delivering consistent outperformance in recent years has been the changeability of markets.

Over the past 25 years, he said, while there has been a high percentage of ‘up’ quarters they have tended to be “punctuated by sharp crevasse-like falls” making the total return more modest.

“Taking advantage of the crevasses is, arithmetically, more important than capturing the highest percentage of ‘up’ moves,” he said.


 

Additionally, the Ruffer chairman said markets have enjoyed an bull run over the past 30-plus years, although that has been challenged more recently by conditions following the global financial crisis.

Indeed, as interest rates have fallen to record lows, government bonds have traded at expensive levels leading other assets to trade sympathetically upwards. However, Ruffer said he does not feel bonds are overvalued compared with equities.

Performance of indices in USD over 10yrs

 
Source: FE Analytics

“Markets look absolutely expensive by historic yardsticks, but they don’t look expensive compared to bonds, and bonds don’t look expensive if long-term interest rates are regarded as settled,” he said.

“Certainly, governments and market strategists alike seem to believe that they will remain at or around their current levels.”

He added: “In this world, either all asset classes are underpinned because they are fairly-priced against one another, or they are all overpriced, and will fall in unison.”

As such, a conventional diversified portfolio divided between stocks and fixed interest “will most likely prove a false haven of safety”, according to Ruffer.

“As interest rates rise, the Federal Reserve will discover that assumptions about long–term discount rates – the basis for market valuations – will reflect this,” he said. “It is a dangerous prospect for investors.”

Ruffer said all investors have a natural investment bias and pointed out that his is not to be bearish but to be contrarian.

He added that investors who are bearish by nature have been “killed or starved to death” as markets continued to grind higher as bad news became discounted and walls of worry were climbed time and time again.

The investment veteran explained: “We are fearful of trying to be entirely right, because investment positions which are right for one environment will be wrong for another, and who is to say that events will play out according to one’s prejudices?

“In short, our disciplines have saved us from our bias; if the markets turn sharply down, you can be sure that our contrariness will make us naturally bullish much too soon.”


 

Ruffer said the firm has missed many great opportunities because of its approach to investment, noting that it did not invest in drinks mixer company Fevertree and failed to make as much from the FAANGs – Facebook, Amazon, Apple, Netflix and Google – trade as other higher conviction backers.

Conversely, the firm’s backing of Japanese banks for a reflationary environment has hurt performance as real growth has offset the impact of any inflation, although he expects the trade to come through during the second half of the year as economic conditions have delayed the rise.

While the firm has also turned more friendly towards the US dollar – particularly given the Federal Reserve’s rate-hiking regime – Ruffer has been reluctant to make a “bold and outsized call”.

“Our instincts alone would have produced a considerably poorer performance than we have achieved and will, no doubt, ensure a more compromised ‘success’ at the next inflexion point,” he added.

“Compromising our contrarian instincts, for better or for worse, is a key part of our conservatism, since markets can outlast the strongest conviction – and will that conviction be right, anyway?”

 

The firm’s flagship LF Ruffer Total Return fund – run by FE Alpha Managers David Ballance and Steve Russell – targets low volatility and positive returns through investment in a portfolio of mixed assets.

Over 10 years, the fund has delivered a total return of 101.80 per cent compared with a gain of 65.41 per cent for the average IA Mixed Investment 20-60% Shares sector peer and a 127.19 per cent return for the FTSE All Share index benchmark.

Performance of fund vs sector & benchmark over 10yrs

 
Source: FE Analytics

During the first six months of the year, however, the fund has delivered a loss of 0.43 per cent, in-line with a 0.43 per cent loss for the average sector peer but behind the 1.69 per cent benchmark return.

LF Ruffer Total Return has an ongoing charges figure (OCF) of 1.25 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.