Ruffer will stay defensive ahead of ‘uncomfortable ride’ in 2023

Ruffer Investment Company defied the odds and ended 2022 in positive territory and outperforming the FTSE All Share.

The capital preservation-focussed investment trust delivered a NAV total return of 4.8 per cent in the six months to 31 December, bringing its annual total return to 8 per cent.

But it said that achieving that wasn’t easy in a year when the global stock market fell almost 20 per cent and bonds took a hammering from rising interest rates too. 

In its end of year report, Ruffer noted that there were few places for investors to hide. 

The investment managers report, from co-managers Duncan MacInnes and Jasmine Yeo, said: ‘The writer Charles Bukowski said “what matters most is how well you walk through the fire” – this feels particularly apt to describe 2022, where investors in most asset classes got burnt. Even an investor who had perfect foresight might still have struggled. 

‘Imagine you had predicted interest rates in the US would rise by 400 basis points, not the 80 basis points forecast in January. Or predicted that realised inflation would explode to 40 year highs. 

‘A traditional inflation hedge portfolio of gold, oil, inflation-linked bonds and property would have lost money.and a traditional inflation hedge comprised of gold, oil, inflation-linked bonds and property would have lost money.’

Ruffer said it had been shielded by its ‘unconventional protective toolkit’ which included interest rate hedges via payer swaptions, which added 7.3 per cent to the portfolio return.

In share price terms it returned 4.2 per cent in the second half of the year and 7.3 per cent for the full year, in line with the annualised 7.8 per cent return seen since inception.

At the end of 2022, Ruffer was trading at a 1.02 per cent premium to NAV but this has now narrowed to 0.54 per cent, according to AIC data. Shares in Ruffer were up 0.8 per cent at 314p by mid-afternoon.

The biggest detractor last year from Ruffer’s performance was, perhaps unsurprisingly, index-linked gilts which knocked 5 per cent off the portfolio following Kwasi Kwarteng’s disastrous mini-Budget.

‘We have long called these bonds the “crown jewels” in our portfolio due to our conviction that they should provide the best protection in a world of financial repression. We are still of this view,’ said Ruffer’s managers.

‘That a key asset can be so painful to hold yet the overall portfolio out-turn be positive does reflect the impotence of position sizing and portfolio construction.’

Energy stocks also helped Ruffer push into positive territory, adding 0.6 per cent to the portfolio return.

The trust has indicated it will continue to be defensive and in ‘crouch mode’ into 2023 given quantitative tightening continues to ‘drain liquidity from financial markets [and] risk assets look vulnerable to a liquidation.’

‘To protect against this, we continue to use credit protections. The protection armoury is further bolstered by single name and equity index put options.’

Ruffer predicts that, in the near term, we will enter one of the ‘disinflationary lurches’ with bond yields coming down in response to a ‘bumpy recessionary landing for the economy.’

Longer term ‘the inflationary destination remains crystal clear’ with the manager now expecting inflation to average between 3 and 4 per cent over the coming decade ‘but with much greater volatility.’

‘We go into the year set up for an uncomfortable ride.’

Ruffer says it goes into 2023 with a highly liquid portfolio ‘ready to capitalise on opportunities the turmoil may create.

‘Our assessment is that this is a poor time to take risk. Patience and preparation are our watchwords and, in the meantime, for the first time in 14 years, you are paid a decent return to wait.’