Ruffer Investment Company (RICA) has released its annual results for the financial year ending 30 June 2023.
- Over the 12 month period RICA generated a NAV total return of -1.7%, and share price return of -7.2%.
- The drivers behind RICA’s negative financial year returns were its use of protections strategies and derivatives, with its equity puts, credit protection, and VIX (volatility) calls dragging on performance. RICA’s unhedged currency exposure would be the largest driver of underperformance, with sterling appreciating over the period. The trust commodity exposure also dragged. RICA did generate strong performance from its long positions in equities and bonds, though insufficient to offset its losses.
- The trust also saw it move from a premium to a discount, with 2023 being one of only four periods since 2004 that RICA traded on a sustained discount. RICA finished its financial year on a 3.4% discount, compared to the 1.7% premium it traded on at the end of its last financial year. RICA currently trades on a 1.2% discount.
- The team believes there is strong evidence that we are approaching a developed world recession and a withdrawal of liquidity. As such they have made major changes to RICA’s portfolio over recent months; which include: reducing equities to a 14% weighting, while adding further equity downside protection; increasing the duration of its bond exposure; increasing their currency exposure to the yen and US dollar; and reducing gold and copper exposure.
RICA’s investment managers commented:
“The recession, when it comes, will arrive with a sudden thud. Sentiment, valuation and market narratives are akin to an echo-bubble of 2021. The pessimism of 2022 has been forgotten and the markets are pricing a soft landing fuelled by AI-driven productivity improvements. The key dynamic is that monetary policy and liquidity withdrawal work with Milton Friedman’s infamous long and variable lags, but their inevitable bite on economic activity and asset prices is coming.
“Last summer our CIO Henry Maxey wrote that markets were vulnerable to a liquidation. Like the recession, this is taking slightly longer than we expected to materialise, but events are moving our way. It might not feel like it, but we are in a banking crisis.
“Today, we are on a journey to reverse the excess of risk taking forced by zero interest rates. We have gone from a world of ‘there is no alternative’ to a world of many alternatives – this is a profound change. Every asset allocator or investment committee in the world is looking at this data. The conclusion is that they no longer need to own the same quantity of risk assets to hit their expected return target. A 7% expected return portfolio could have a near zero weighting in equity.
“We worry about a global, synchronised de-risking of portfolios. This isn’t about the investment merits of individual asset classes, this is a profound change in the landscape in which people seek to achieve their investment objectives.
“The portfolio needed today – low gross, defensive – to survive the oncoming recession and liquidation is not the portfolio needed in 12-18 months when the economy is recovering and stimulus is back on the table. It’s not the Fed that needs to pivot, it will be investors.”
[QD comment: There are several investment-trust litmus tests for the wider market; the relative performance of growth vs value, the discounts on unlisted strategies, the popularity of IPOs, are but a few examples. The performance of strategies like RICA is also another test. Given the team’s focus on capital preservation and their ability to invest across the whole asset spectrum, a NAV loss by RICA would be a good indicator of how increasingly complex the market has become. Given how narrow market returns have been (whereby markets are once again dominated by a handful of mega cap tech stocks) it is understandably difficult for diversified strategies to generate competitive returns. While one can easily see how RICA failed to capture such a narrow band of return generators, they nonetheless made missteps regarding currency exposure. While it can be forgiven for overseas strategies which opt to avoid hedging, RICA’s position is an active one, so more prudent currency management could have mitigated much of their pain, given their currency losses were the largest contributor to RICA’s underperformance.]