Fund of the week: A powerful hedge against inflation

"If you fear inflation, Ruffer Investment Company (LSE: RICA) is the fund for you," says Richard Dyson in The Mail on Sunday. This little-known investment trust is heavily invested in inflation-linked government bonds (from Britain and other countries), as co-manager Steve Russell believes indebted governments will tolerate high levels of inflation. "This will be good for national deficits but it will attack savers' assets," he tells Dyson.

Russell's primary aim is to preserve investors' capital and, if possible, generate twice the return from cash (a "sensible" level of growth, as he puts it). Generally, that would be around 10%, says Russell. Since the fund's launch in 2004, he has achieved that in annualised terms.

The fund has faced a difficult time due to its large holdings in Japan, but Russell tells CityWire it has emerged unscathed. "We've got nothing directly affected, everything [in terms of price moves] is a market reaction in terms of a sell-off. We don't have any utilities or power." Consequently, the fund's net asset value (NAV) only fell 2%-3%, despite the crisis in Japan.

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But this does highlight one problem with the trust: its popularity. Its solid performance, particularly during the financial crisis, has led to the fund trading at a 5%-or-so premium to NAV (the average since launch in 2004 has been a premium of around 1.4%), so investors may be inclined to wait for it to fall back. CityWire agrees with Dyson about the fund's quality, but notes that Ruffer's Total Return fund "does the same job and is a better bet while the trust trades at such a high value".

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Ruffer Investment Company top ten holdings