Ruffer enjoys turnaround with controversial bitcoin exposure providing upside – Ruffer Investment Company (RICA) has published its annual review for the year to 30 June 2021, during which time, the company’s share price total return was 19.5%, while its NAV return was 15.3%, both higher than the previous year’s figures.
Its 1.5% discount, posted on 30 June 2020, has swung to a premium of 2% one year later while dividends per share over the 12 months are also up to 1.90p.
The managers attribute this strong performance to the shape of its equity book, with risk focused on value, cyclicals, commodities and financials; exposure to bitcoin; and active duration management, whereby the managers offset damage caused by high exposure to index-linked bonds through payer swaptions.
[These are good results for Ruffer, which has often suffered due to its cautious approach. The company has traded on a discount for almost all of 2019 and 2020, swinging as wide as 7% in some instances. Since the start of this year however, Ruffer has been trading on a premium, ironically reaching more than 7% in April. Today, the trust is trading on a premium of 2.97%, which is good news for investors – and especially those who bought while it was much cheaper.]
Statement from the managers:
In the interim report we covered our rationale for adding bitcoin exposure plus two bitcoin proxies (MicroStrategy and Galaxy Digital) in November 2020. The rationale was that bitcoin was an emerging store of value and institutional investors would move to adopt it as a ‘digital gold’. This narrative played out faster than we could have foreseen.
Bitcoin may yet fulfil its potential, but the market displayed many signs of froth – retail speculation, excessive leverage, the Coinbase IPO, Tom Brady’s laser eyes, Dogecoin, Elon Musk hosting Saturday Night Live, $60m non-fungible tokens (NFTs) etc.
In the short term at least, bitcoin was exhibiting the characteristics of a risky, speculative asset and therefore no longer fulfilled the portfolio role we had intended for it as a protective and diversifying asset. We sold all our exposure in April (+515bps performance contribution). Our Chief Investment Officer, Henry Maxey, surmised that excess liquidity has a wonderful way of bringing the hopes of the future into the prices of the present.
During the period there were two returns of capital from Ruffer Illiquid Multi-Strategies Fund 2015. Firstly 0.7% in March and then 2.3% in June 2021. In effect, this was a return of some of the profits from the bitcoin exposure.
Having been hedged for the interest rate spike in Q1 2021, in May and June we added 3% to the long-dated UK index-linked gilts taking these to 13% of the portfolio. We continue to believe these are the best assets for the extended period of financial repression we envisage for the coming years.
Within the equity book, we have been focused on reducing risk in the summer months after value and cyclical stocks experienced a strong run. We have kept equities at around 40% with consistent sales and we have slowly rotated into what we have come to call ‘the forgotten middle’ making up around 8% of the portfolio. This is a cohort of defensive companies which are delightfully dull, sit outside the bluster of the value/growth debate and offer solid cyclically insensitive earnings on low valuations. This includes Tesco, Cigna and Centene, but also newer purchases like GlaxoSmithKline, Fresenius Medical and BAE Systems.
In previous reports and elsewhere we have argued covid has acted as an accelerant, catapulting the world into a new economic regime. This new regime is characterised by the adoption of more interventionist policies to target explicitly political causes such as climate change or inequality. This blurring of the lines between monetary and fiscal policy will lead to higher economic and inflation volatility and marks a stark contrast to the benign period of the past 40 years.
However, we are currently enjoying an economic boom which may well extend into 2022. What is the recipe? Take one-part unleashed animal spirits as we exit lockdown, mix with accumulated lockdown savings, pour on lashings of stimulus – serve in a supply constrained glass.
The debate du jour is whether the current inflationary spurt we are living through is a symptom of this new economic regime or a transitory hangover from the supply and demand disruptions of the lockdowns. The scale and breadth of the inflationary impulse is stunning. The percentage of businesses raising prices is at a 35 year high in the US.
This is not a US phenomenon: global data is very similar. Wage pressures are everywhere, companies cannot get staff. McDonalds are paying candidates $50 to attend interviews. Shortages are a key sign of inflation. The US administration has no sympathy for corporates: if you want workers back, pay them more – this is about levelling up and inequality too.
Used car prices, container shipping rates, house prices, hotel rates, the cost of eating out – the trend is clear, and it is up. Yet long term measures of inflation expectations remain anchored, the market is confident this impulse shall recede.
We think this ‘transitory debate’ misses the point entirely. Of course, house prices will not rise at 10-20% annualised forever. Inflation is simply a measure of the rate of change. If that delicious beer garden pint was £4.50 in 2019 and now it costs £6, it has inflated by 33%. Next year it might cost £6.25. The Bank of England might say “See! Inflation was transitory, it’s only 4%, we told you!”, but unless wages have risen by 39% since 2019, you should be feeling worse off.
We fully appreciate that due to base effects it is highly likely that as re-opening enthusiasm wanes inflation is likely to be lower next year. Technically, the transitory crew might be correct, but unless the beer reverts to £4.50, we would say it is 1-0 to the inflation hawks in the real world. The price level is what comes out of your pocket not the second derivative.
This is a febrile environment for a wage and demand spiral considering the context of vast ongoing quantitative easing and seemingly endless fiscal stimulus packages.
The big problem is if the inflationary genie is out of the bottle, how might policymakers get it back in? The textbook response is that the central bank should raise interest rates. Realistically however, this tool is not available to today’s cohort of central bankers for multiple reasons. Firstly, the burden of debt in the world is just too great to service at higher interest costs. Secondly, the political pressures to keep financial conditions supportive in aid of activist policy goals such as tackling climate change or inequality have only grown stronger. So, if these inflationary pressures prove more than transitory, we may realise for the first time in a few decades that central bankers are not omnipotent.
RICA : Ruffer enjoys turnaround with controversial bitcoin exposure providing upside
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