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Ruffer reports returns in line with its objective


Ruffer reports returns in line with its objective – Ruffer Investment Company (RICA) has released its annual report for the year ended 30 June 2018.

The NAV of the company rose by 0.8% on a total return basis.  The target return for the twelve month period to the end of June was 0.8%. Without its dividend of 1.8p per share taken into consideration, the NAV was almost flat over the year (-0.03%).

As reference, the FTSE All-Share Total Return index rose by 9% over the year. This is not the company’s target.

Performance relative to objective

RICA’s objective is to achieve a positive total annual return, after all expenses, of at least twice the Bank of England base rate.

  • The Bank of England doubled rates to 0.5% on 2 November 2017 and there they stayed until 2 August 2018 when they were raised to 0.75%.
  • The blended average rate for the 12-month period ended 30 June was therefore 0.4%, which, when doubled, gave the company a target return of 0.8%.
  • As the chairman of RICA points out, the objective is to preserve capital and not to try and shoot the lights out, “especially when those lights are so elevated and burning brightly”. By this, the chairman is referring to the fact that globally equity valuations are at or close to all time highs

The chairman accepts that this return, whilst in line with the target, is “pedestrian”, when compared to the previous year’s 8.8% return and the 7.8% annualised return generated since launch in 2004. Since launch, the NAV of the company has risen by 185.7% including dividends, compared with a rise of 69.4% in the target return and 216.3% in the FTSE All-Share Total Return index.


The portfolio was defensively positioned and the drag on performance was largely down to the cost of option protection and the illiquid strategy funds.

In the last 12 months the investment manager’s contrarian stance on UK equities contributed 2.38% per share. However, the focus on cyclical and value stocks in the US equities contributed 0.76% and Japan and Europe 0.45%. Index-linked bonds and gold made small positive contributions (0.44% and 0.17% respectively). The cost of using options to protect performance took away 2.13% and the illiquid strategies vehicles detracted from performance by 0.56 bps.

The portfolio protection was there to cover the portfolio should markets fall significantly (-15%).  Market corrected in February by c.10%.  In times when many investors are very cautious, the manager wanted to keep the portfolio protected, and consequently quite a lot of the options subsequently expired worthless as markets rebounded.


The manager is concerned about the outlook for global markets and has adopted a cautious stance using index-linked bonds and gold to protect against rising inflation, while options and illiquid strategies investments protect against falling equity and bond markets. As it is very hard to predict when anything negative may happen, conventional assets (equities, bonds, etc.) are held alongside the protective investments in order to generate a return should the manager’s caution “be misplaced or prove to be too early”. A significant proportion of the positions in traditional assets are held in Japan, which the manager sees as offering cheap exposure to global economic growth and the domestic reflation story in Japan. There are also holdings in a variety of stock specific opportunities predominantly in the US, UK and Europe but the Manager is not restricted to these regions.

Investment manager’s outlook
“It is safe to say that we are worried about the outlook for markets. The 10% fall in global equities at the start of February gave investors a peek under the curtain at some of the worrying technical dynamics in global markets. High valuations in many areas are justified only by the cheap cost of money and so any news which will lead to bond yields rising faster than expected (for example wage growth, inflation or widening credit spreads) undermines this position. At the same time liquidity in financial markets has been greatly reduced by structural changes brought about by regulation since the financial crisis. This need not be the catalyst for a crisis, but it means that markets are more crash prone – limited liquidity will amplify market moves. This is not helped by the exponential growth of unthinking passive vehicles (aka Exchange Traded Funds), which create virtuous circles on the way up, but vicious ones on the way down. Huge debt issuance by low grade corporates and sovereigns and a general hunger for yield at any price has created products where there is a mismatch between the liquidity of the vehicles in which the credit instruments are held (they typically promise daily or weekly dealing opportunities) and the underlying assets, which may not trade at all on a weekly basis. Finally, there are perversities in the trading of volatility. For the last 10 years investors have been encouraged to sell volatility because at the first sign of trouble the world’s central banks have moved swiftly to calm investors’ nerves. On top of this volatility has become both an output and an input of the investment process. Most risk models have volatility at their core and so low volatility acts as a signal to leverage up and buy. February briefly showed how this can create distortions, which unwind very quickly when the wind changes. We took some profits in our volatility call options in early February, but we maintain the view that these events were likely a tremor before the earthquake.

This all makes for chastening reading, but we feel that these risks are immediate enough to warrant taking positive action now and we would be doing our investors a disservice to ignore them in the hope of capturing the final hoorah in a long-in-the-tooth bull market. Our belief is that the protective investments in the Company will carry us through the next crisis but, given that we do not know its timing, the equity book has an important role to play to allow us to generate a return for shareholders if these events prove to be some way off.”

RICA : Ruffer reports returns in line with its objective


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