The recent volatility in share prices is just the beginning, says Jonathan Ruffer, co-founder and chairman of Ruffer Investment. "We are confident that the earthquake will happen, and more confident than we have been that it will happen in months, not years," he said in his latest quarterly review, notes The Daily Telegraph. The trouble is that investors have "come to believe the assets they own are safer than they actually are". Volatility (the scale and frequency of fluctuations in price movements) in stock and bond markets had, until February, been falling ever lower, and volatility is "how the majority of the asset-management industry judges risk".
Yet in reality, the risk of loss has been rising, not falling, across the board. "Financial engineering" has seen the level of borrowing on corporate balance sheets rise, making equity ownership riskier. Corporate-bond portfolios have lengthened in duration, meaning they are more sensitive to interest-rate changes. And investors are no longer reaping sufficient rewards from property and other alternative assets to compensate for how illiquid such assets are.
This is why volatility is a "central theme" in the investment manager's thinking, says the Financial Times. Last year Ruffer made headlines after spending $200m on derivatives contracts protecting against a rise in volatility. When US stockmarkets cratered earlier this year, this paid off handsomely although the "not inconsiderable amount" made on these derivatives positions still did not entirely offset the losses made in other investments in the fund's portfolio during the first quarter.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Dividends: Reliability in uncertain timesDividends have formed over half of the total return of the UK market over the last 20 years. Dividend strategies have been under-appreciated while investors have focused on US mega cap technology. Income strategies may have more appeal in a tougher investment climate
-
Trump’s tariffs: what is he thinking and how should UK respond?Every right-thinking person knows that free trade is a surer route to the wealth of nations than protectionism, says Stuart Watkins. What is Trump thinking?
