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Ruffer goes for growth despite 'tougher times' ahead

Ruffer goes for growth despite 'tougher times' ahead

Ruffer Investment Company (RICA) has set out plans to grow by a third, conscious that its successful record as a defensive fund will appeal to investors in the ‘tougher times’ it sees ahead, although it warns turbulent markets will make it harder to preserve shareholders’ capital.

The multi-asset investment company, one of only a handful of funds to make a positive return in the 2008 financial crisis, looks to exploit investor demand for a more cautious approach after an eight-year bull market.

In its annual report for the year ending 30 June, chairman of the trust Ashe Windham said the board aimed to grow its market value from £376 million to £500 million ‘at which point liquidity should be good enough that even the largest wealth managers should continue to be able to acquire our shares’.

Over its financial year the trust, whose shares stand at a 1.8% premium over their net asset value (NAV), just above the 12-month average, issued over 8.3 million shares. In July it issued a further 1.5 million, which it said not only improved the tradeability of the stock but spread its fixed costs over a wider pool of assets and reduced the ongoing charges paid by investors to 1.18%.

The portfolio of shares, index-linked bonds, gold and interest rate options achieved a total return including dividends of 8.75% in the 12 months to June. This handsomely beat its 0.5% target of double the Bank of England base rate but trailed the FTSE All-Share index which delivered 18.1%.

Windham said the return was ‘satisfactory’ given the defensive position of the fund and was in line with its average annual total return of 8.4% since the Guernsey-based fund launched in 2004.

However, it has cut its total dividends for the year to 2.6p from 3.4p, deciding it can no longer subsidise payouts from its income reserves. Last year it cautioned that a dividend cut was likely after warning about the dwindling income it was earning from zero-yielding, defensive investments. Its shares currently yield just 0.8%.

Income has never been a big part of the Ruffer proposition. Unlike a growing number of investment trusts and companies, Ruffer refuses to pay dividends from its reserves of capital gains, believing to do so would undermine its goal to preserve shareholder capital.

Although its holdings in index-linked gilts plunged by as much as 20% in May and June as expectations of higher interest rates rose, Windham said the board believed they were ‘the real treasure in the portfolio’ and would perform well when, as it believes, inflation inevitably rises in response to the West’s debt crisis.

Japan was the biggest contributor to the fund’s performance, as it gained exposure to global growth through the region.

‘While there is an interesting macro story in Japan, focusing on [prime minister] Abe’s ability to slay the dragon of deflation, our investments there also provided exposure to economic growth outside Japan and by extension strong global equity markets,’ said managers Steve Russell and Hamish Baillie (pictured right and left).

Boeing (BA.N) and Barratt Developments (BDEV) were the individual stocks that contributed most to performance.

While there are plans to expand the fund, the managers realise it will be against a tougher backdrop and said the economy is at a ‘crucial juncture’ where ‘the stakes are now higher and the options more limited’.

Coupled with political winds that are pushing austerity off the table, the government will be forced to spend to boost growth and borrow more to fund that spending.

‘The inflationary risks were already high and they are about to get higher,’ they said, with inflation-linked bonds playing a ‘crucial role’.

‘There will be tougher times ahead that will change our ability to preserve capital, but if we remain focused on protecting investors’ capital and manage to repeat the performance of the last 12 months in making a steady positive return, then the company should have a useful role to play for its investors,’ they said.

Ruffer sits in the AIC Flexible sector alongside investment companies that have the freedom to invest in a wide range of assets. It is most comparable to Personal Assets (PNL), run by Sebastian Lyon at Troy Asset Management. Over the long term both have beaten the FTSE All-Share by avoiding the big crashes in the index. In the past five years, however, their total shareholder returns of 28% (RICA) and 25% (PNL) have trailed the 64% gain in the index. Over 10 years, Ruffer has the edge having achieved a 146% totall return against 84% from its rival.

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