Until fairly recently, I’d have said there was fat chance of us seeing the kind of 3% to 5% inflation that would justify wanting inflation insurance. For most of the last few years investors and economists have been worried about the exact opposite – deflation. Yet more recently signs have been pointing in the opposite direction, with forecasting group EY Item Club warning that inflation will climb by 2.6% in 2017.
Even more than most countries, we in Britain should worry about inflation for an obvious reason – sterling’s rapid devaluation and its impact on the price of imports. This is why it’s best to have insurance against the virulent re-emergence of inflation. And that’s where the Ruffer Investment Company (LSE: RICA) comes in.
This closed-end investment trust has long viewed inflation as a long-term threat, and believed that there’s good money to be made from banking on it. As French bank Societe Generale says, “at a time when equities and bonds have never been so expensive… having an asset uncorrelated from others could provide some cushion to the performance of a multi-asset portfolio in the event of a market correction”.
So RICA has made one huge bet over the last few years – investing in inflation-linked bonds. These are currently the “crown jewels” in the Ruffer portfolio, comprising 44% of all assets.
The fund’s managers, Steve Russell and Hamish Baillie, have a capital-preservation mind-set, which often means going against the grain in a contrarian fashion. For a long time the fund bet heavily on Japanese equities – at times painfully – as that market failed to move. Now it’s banked profits, reducing Japanese exposure to under 20%.
The big index-linked bet is a similar contrarian investment – the managers evidently have concerns about excessive debt and the likelihood of the return of inflation. Their focus on capital preservation is also reflected in a 7% weighting in gold and gold-mining equities, 6% weighting in illiquid strategies and 3% in cash. They’re a cautious bunch when it comes to the current excitability of equity markets: only 37% of the portfolio is in equities, down from 40% at the end of 2015.
It’s strong stuff. Taking strong, almost contrarian, views can be a disadvantage in the wrong kind of markets – ie, very bullish equity markets. The fund struggled in the first half of the financial year, with its net asset value (NAV) down 4.6%, as investments held for protection failed to offset the declines in equity markets. The good news is that performance has been much stronger in the second half of the year, with NAV up 3.8%, helped by index-linked bonds (+5.9%) and gold (+3.1%) offsetting losses in equities (-4.3%).
Ruffer “has a strong track record of insulating against market falls, but typically lags in rising markets”, note analysts at broker Numis. “In particular it performed well during the global financial crisis with NAV up 26% in 2008 compared with a 30% fall in the FTSE All Share.”
This isn’t a fund for those looking for unconstrained equity-market bullishness, or for income-orientated investors. However, if you are a cautious older investor who is more worried about wealth preservation, higher inflation and market volatility, then this widely respected fund might make sense. It is trading at a sensible premium to NAV of around 1%, which is very acceptable for this fund. It’s one to add to my list of long-term favourites.