Ruffer’s Steve Russell has blamed sterling’s strength against the dollar as the key factor behind negative 12-month numbers on his capital protection-focused Total Return fund.
After falling 1.6 per cent in the 12 months to end-March, the portfolio dropped a further 1 per cent in April, in what Mr Russell called a “black mark against an overarching objective of capital preservation”.
He said cynics might point to the fund’s long-held positive stance on Japan amid the region’s recent sell-off as the cause of the fall, but instead he cited sterling as the key.
“With roughly 20 per cent of our portfolio exposed to the US currency, simple maths suggests last year’s appreciation of the pound has cost around 2 per cent to fund performance,” he added.
Mr Russell said two “considerations” dictate the group’s thinking on currencies: first, the aim of these positions should be avoiding losses rather than garnering profits, and second, how low should they be in the base currency of the bulk of investors.
“To the extent our dollar position is held as an offset to equity weightings, the logic behind this is that the near-zero interest rate policy in the US has revived the notion of the dollar as a funding currency. So far, so justifiable,” he added.
“Thus the dollar travelling in a different direction from equities has been neither unexpected nor a sin, though some might argue it has almost been too effective as an offset. But here we come up against the second consideration – how low do we want to be in sterling?”
With hindsight, Mr Russell said he would have held more sterling and reduced losses, although he still saw many potential headwinds for the currency.
“We see an economy exhibiting rapid growth, unleashed largely by government and central bank help in the form of Funding for Lending and Help to Buy,” he said.
“Rebalancing will be a slow process, even if business spending is finally reviving, and the current account deficit makes sterling look vulnerable on anything other than a short-term view.
“It seems that once again, much as in the run-up to 2008, sterling is acting as a ‘risk on’ pro-cyclical counter, and the fundamental problems that beset the UK – high and rising leverage, insufficient savings, and dependence on foreign capital – all remain.”
For Mr Russell then, having approximately 40 per cent of currency exposure outside sterling, while painful in the short term, remains prudent considering the harder questions being asked of the UK.
“Some of sterling’s recent strength has certainly come from a perception that the UK will be the first major bloc to raise interest rates,” he said.
“Those trading on that notion might want to be careful what they wish for when the effects of a base rate rise on the UK economy, given its continuing level of debt, are scrutinised more closely.”
