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Ruffer: banks will protect us if we're wrong about inflation

Jonathan Ruffer says his funds group's heavy exposure to banks should provide protection if big inflation call turns out wrong.

Ruffer: banks will protect us if we're wrong about inflation

Jonathan Ruffer believes his fund group's heavy exposure to banks and insurers should protect returns if his long-held belief in the threat posed by resurgent inflation is wrong.

The Ruffer Investment Company (RICA ) investment trust's biggest position, at 27% of the portfolio, is in index-linked gilts, to protect against this. But the fund's shares portion also features a heavy weighting to banks and insurers, which runs counter to the overall conservative approach of managers Hamish Baillie and Steve Russell.

'In the event of a dislocative fall in the markets, these would not do well, but there is a possibility that after 10 years of anaemia, the world sees a burst of coordinated real growth, without, for the moment, any inflation,' Ruffer said. 

'The financials are not priced for this at all, and could be expected to be very strong. Their virtue will be to protect the portfolios from assets which would fall in this eventuality.' 

Among the parts of the portfolio that could be expected to fall in this scenario would be the position in index-linked bonds, especially the long-dated portion of this position.

'We could see extreme circumstances where they lose the majority of their value (circumstances which would drive the financials up by an equivalent amount), or multiply by around 30 times,' Ruffer (pictured) said. 

'The financials are there in size to protect us from being "wrong" on the inflation call. I put the ‘wrong’ in inverted commas, because it is perfectly possible that it will be the onset of deep deflationary conditions which causes governments and central banks to do those things that hasten a long period of high inflation.' 

The Ruffer investment trust's conservative positioning has seen its shares trade sideways over the last, up just 2.1% while global markets have rallied 12.5%.

5 comments so far. Why not have your say?

Law Man

Oct 12, 2017 at 17:14

This is why I hold RICA, as one of my 'wealth preservation funds'. Overall, a steady growth at inflation plus gives a balance to general equities; today unlike long duration bonds.

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Oct 13, 2017 at 11:01

I agree - I hold RICA in my long term portfolio along with short dated corporate bonds, CGT and RCPT (a bit more aggressive) to dampen the volatility of the equity holdings and to preserve past gains. Ruffer was one of the few, the very few, fund managers who got through 2008/09 more or less intact. It seems likely that these skills will be needed again in the near future.

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Paul Newman

Oct 14, 2017 at 13:03

So if RICA is right the financial shares will lead to the trust not performing and if they are wrong the index linked will prevent the trust from performing. Clearly very good hedges but not a trust to own if you want to make money. RICA seems like a more complex way to stuff cash under your mattress.

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Oct 15, 2017 at 10:29

Paul - yes cash is one of the options (until we move to a cashless society which we are one of the world leaders in doing). Cash will steadily lose its value if inflation increases, and more to the point if under the mattress, will be outside an ISA or a SIPP. And then there is the currency risk.

The attractions for funds like RICA was what happened in 2008/09 - by switching into such funds before the collapse, you could then switch back into more growth orientated investments once the market had bottomed out. People who did this started again at a much higher baseline than those who simply stuck in pure equity funds. The ability to feed in cash from outside such accounts is limited to the annual amounts allowed.

While it's a mug's game trying to accurately time the market, the reality is that we are much closer now to the next recession than the last one - this bull market run is already a long one on a historical basis. Because the last few years have given investors some very good returns, there is a lot of sense in taking some of those gains off the table for now. The short term objective is to avoid having to sell anything whose price has gone markedly down to meet your income needs while the market is low. The longer term one is to be able to buy as soon as that becomes sensible again. For equity holdings the view is that you should be able to hold them for 5 -10 years without having to panic sell. Sadly retail investors often have a habit of buying high and selling low rather than the other way round.

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Rich John

May 10, 2018 at 12:43

Capital Gearing Trust has a larger percentage of Fixed Interest holdings, wouldn't they therefore provide better protection than Ruffer?

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