Ruffer’s portfolio exhibits better balance in first half of 2024

Ruffer (RICA) has published its “Investment Manager’s Year End Review” for the year ended 30 June 2024. This review, which is unaudited, is intended to give shareholders unaudited key performance indicators and a portfolio review in a timely fashion.

The net asset value (NAV) total return for the financial year to 30 June 2024 was +1.0% and the share price total return was -0.6%. The NAV total return for the six months to 30 June 2024 was +0.4% and the share price total return was -0.9%. RICA’s manager says that the first six months of 2024 felt like a continuation of 2023. Markets rallied to all-time highs on a tide of AI-fuelled optimism, a US led fiscal boom, and a belief that the Fed is willing to be supportive of markets is back. Global markets were once again led higher by US exceptionalism and by the ‘Magnificent Seven’ in particular. Importantly though, the manager says that RICA’s portfolio exhibited a better balance in the first six months of 2024 than in 2023: its growth assets in equities and commodities kept it in the game whilst its protection assets continued to hold the portfolio back.

Looking forward, RICA’s manager is excited about the opportunity it sees in front of it, believing investors are complacent and it has arguably never seen an equity market as crowded, narrow, and myopic as the one it sees today. It thinks that the prospective rewards, relative and absolute, for having a portfolio unlike both peers and benchmarks have never been higher. However, it adds that the price you must pay is feeling uncomfortable, and lagging the herd, whilst waiting for the market to turn.

Performance contributions over 12 months

RICA’s manager maintained the level of protection in portfolios over the year but it says that, in contrast to the second quarter of 2023, the growth assets have contributed to ensure that performance has held steady. The largest cost to the portfolio was the equity downside and credit protections, costing over -3% as markets have continued to move higher, albeit in increasingly narrow fashion. This meant that assets held to benefit from a fall in equity indices and an increase in volatility, were not required. Similarly, despite cracks appearing in the US economy (the US’s Senior Loan Officer Opinion Survey revealed the net percentage of banks seeing stronger loan demand is at a 30-year low and credit card and auto loan delinquencies are at levels last seen in the GFC), credit markets remained benign meaning exposure to credit default swap strategies also fell in value.

In aggregate, bonds suffered (costing the portfolio -0.8%) as inflation-adjusted interest rates continued to rise. The other main detractor was the yen which continued to weaken, falling -11% versus sterling over the period, costing the portfolio -2.2%. The manager continues to hold the currency in size in anticipation of a more meaningful policy shift from the Bank of Japan (which appears a matter of when rather than if given the domestic backlash from their newfound inflation) as well as for its protective characteristics in market crises.

In terms of positive contributions, RICA’s equity exposure delivered +3.0% in aggregate, driven by some exposure to the AI theme via Amazon (+48%) and TSMC (+71%) alongside strong bottom-up stock picks such as Rolls Royce (+202%) and a basket of US banks. This was supported by tactical increases in equity during November as well as the start of 2024 via S&P call options, which contributed +0.9% over the period.

RICA’s commodity exposure, a key offset in the portfolio and held to drive returns in an environment of robust fundamentals and rising bond yields, delivered across oil, copper and uranium exposure, with the holding in a brent oil ETC being the largest individual asset contributor (+1.1%). Finally, as rates remain elevated, the portfolio’s US floating rate notes (FRNs) and short-dated UK government bonds made a meaningful contribution (+1.6%) to returns.

Performance contributions for six months

RICA’s manager comments that the fund also delivered a positive performance over the six-month period with the performance drivers over the second half of the period looking similar to the first; but with a bright spot for the derivative protections that came in April as markets wobbled on concerns of stickier inflation and higher-for-longer rates. This meant that whilst, overall, these assets dragged performance as a robust economy combined with the expectation of interest rate cuts allowed equity markets to continue their upward march and credit spreads to narrow, the cost to the portfolio (-0.8%) was significantly less than the prior six months.

It adds that the yen was particularly painful in the first six months of 2024 (costing -2.5%), despite intervention by Japan’s Ministry of Finance, as investors shifted expectations of US interest rate cuts from six to two, widening the interest rate differential across the Pacific. This dynamic, driven by continued economic strength and persistent inflation, also hurt RICA’s index-linked bonds, given their long-dated nature and therefore interest rate sensitivity.

On the other side of the ledger, RICA’s equity exposure profited from the rally (adding +1.3% to performance) and was boosted by additions to equity call options in January. Top performers over the second half of the year included TSMC (+64%), General Electric (+56%) and the basket of investment trust holdings including Hipgnosis Songs Fund, Trident Royalties, Taylor Maritime and Tufton Oceanic Assets that added +0.4% to performance.

The manager adds that, again, RICA’s commodity exposure had a key role to play, as gold reached new highs, on the surface in reaction to inflation and geopolitical concerns but perhaps also sniffing out the coming era of fiscal dominance. RICA’s portfolio captured the rally, with the manager having built the precious metals exposure to more than 8% by the end of March via a mixture of gold mining equities, silver bullion and latterly platinum exposure (all catch plays on the move in the yellow metal), contributing +1.5% in aggregate.