Bitcoin behind another good year for cautious Ruffer – Ruffer Investment Company (RICA) has published its full-year results for the 12 months to 30 June 2021. During the period, its NAV total return was 15.3%, while its share price total return was 19.5%. The NAV return was boosted by the 1.5% discount moving to a 2% premium over the year.
During the year, RICA generated 3.30p per share of revenue and 33.13p per share of capital gain. For the company to remain able to be marketed to a UK retail client base, it must distribute at least 85% of revenue earned in any given year. Having paid out an interim dividend in March 2021 amounting to 0.95p per share, RICA has declared a second interim dividend for this year of 1.55 pence per share, of which 0.7 pence relates to a one-off dividend received from one of the company’s investments. The remaining balance of revenue earned has been retained to add to the revenue reserves.
Extract from the manager’s report
Principal performance contributions
Ruffer Investment Company is not alone in posting good performance numbers over the last 12 months. However, our returns are distinctive both in terms of their source and profile.
- The shape of the equity book – our equity risk has been focused on value, cyclicals, commodities, and financials since 2018. We added to these positions in the summer of 2020 when the market was most enamoured with the ‘covid winners’. We enjoyed particularly strong returns from the stocks geared into re-opening and recovery; UK banks (+57% and 256bps), Walt Disney (+67% and 82bps), General Motors (+135% and 84bps), Cemex (+115% and 40bps) and Arcelor Mittal (+97% and 65bps). These thematic exposures in the portfolio drove significant performance, particularly since the announcement of the vaccine approvals in November 2020.
Exposure to UK equities, previously unloved by investors, also came to life with our smaller companies exposure of around 5% adding 186bps to the return in the 12 months. - Bitcoin – exposure to bitcoin was a significant contributor over the period (+515bps) and offers a good example of the flexibility of the Ruffer strategy and our willingness to embrace uncomfortable or idiosyncratic risks. A well-timed exit of our exposure in April 2021 avoided giving back much of the gain in the recent sell-off. MicroStrategy (+421% and 47bps) and Galaxy Digital (+337% and 58bps) were also sold in February.
- Active duration management – Q1 2021 was one of the worst for bonds in modern history. Despite having over 30% of the portfolio in index-linked bonds, we were able to offset the damage from this risk through the opportunistic use of payer swaptions that lowered the net portfolio duration (sensitivity to changes in interest rates) to zero and index-linked bonds were helped by rising inflation expectations.
Credit protections which helped the portfolio to weather the covid-19 crash were significantly monetised in the heat of the crisis in March 2020. However, within the period, the remaining position gave back 250bps of performance as governments and central banks rode to the rescue of corporate debt markets. We decided it was necessary to retain some of these positions due to ongoing fragility and uncertainty in markets, but the position was reduced in both size and potency.
Gold’s contribution was also negative, something that feels quite anomalous in the context of rampant monetary stimulus and inflation concerns. On 30 June 2020, the gold price was US$1,780 and it closed the period a year later at US$1,790, up less than 1% with the gold mining equities index also flat. Our exposure is focused on higher beta, more operationally geared smaller gold mining stocks.
Portfolio changes
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, US$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 2021 (+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 2021 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 2021 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 (see below).
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.
Investment outlook – A new inflationary regime
In previous reports and elsewhere we have argued covid-19 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.
This is not a US phenomenon: global data is very similar. Wage pressures are everywhere, companies cannot get staff. McDonalds are paying candidates US$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 – Bitcoin behind another good year for cautious Ruffer