- Positive return despite difficult markets in 2022
- Unconventional hedges drive outperformance
- High level of liquidity going into 2023
Capital preservation investment trust Ruffer Investment Company (RICA) delivered a total return in net asset value of 4.8% for the six months to 31 December, taking the calendar return to 8%.
The share price returns were slightly lower at 4.2% for the second half and 7.3% for the full year, still well ahead of the FTSE 100 and in line with the total return seen since inception of 7.8% a year which is above the return on UK equities with lower variability.
The shares were unchanged at 312p in early trading.
FEW PLACES TO HIDE
The manager points out that, aside from the strength of the US dollar, there were few places for investors to hide last year even if investors had perfect hindsight.
As an illustration, a traditional inflation hedge comprised of gold, oil, inflation-linked bonds and property would have lost money.
Both bonds and stocks fell for three consecutive quarters, which destroyed the usual benefits of diversification. The biggest contributors to performance came from the firm’s ‘unconventional protective toolkit’.
HOW DID RUFFER GENERATE RETURNS?
The bulk of the annual return was the result of interest rate hedges which added 7.3% while equity downside protection added 3% to the portfolio return.
Downside protection was gained through purchasing put options on ‘crowded and profitless tech stocks in Q1, European banks in February and Tesla (TSLA:NASDAQ) and the S&P 500 in the latter part of the year’. Put options give the holder the right but not the obligation to sell shares at a set price in the future.
The biggest detractor was the fund’s position in index-linked gilts where prices fell by two-thirds and the asset class knocked 5% off performance. Most of the ‘damage’ was offset by the aforementioned interest rate hedges.
WHAT IS THE INVESTMENT OUTLOOK?
In the near term, the fund is positioned for a ‘disinflationary lurch’ with bond yields retreating in response to a ‘bumpy’ recessionary landing although the manager is looking for an opportunity to pivot towards a portfolio for higher nominal growth and financial repression.
Looking at the big picture Ruffer believes the next decade could herald higher average inflation of between 3% and 4% with much greater variability than seen in the past.
The manager points to IMF (International Monetary Fund) data which suggests it can take a decade for inflation to drop back once it is moves above the threshold of 5%.
Ruffer goes into 2023 with its lowest-ever weighting to equities and high levels of liquidity. The manager comments: ‘We maintain 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.’
