A dividend cut and below par performance that “missed out on the easy gains” is not enough to push Hamish Baillie, lead manager of the £376m Ruffer Investment Trust, to change his defensive strategy.
In the annual report of the trust, Mr Ballie said after a strong year in 2016, the performance in 2017 has “been doing a fair impression of marching on the spot.”
The fund manager said he is “used to” such underperformance in a climate of equity markets rapidly rising, but where he believes a market downturn is on the horizon.
He said: “Following last year’s brief flirtation with reflation, which saw bond yields rise and cyclical/value stocks making gains, this year investors have flocked back to the ‘new normal’ universe of bond-like equities (consumer staples) and growth (tech).
"Introducing uncertainty over interest rates, bond yields and inflation is to say the least unlikely to be supportive of either equities in general or these crowded trades in particular.”
Mr Baillie added the trust is happy to be on the “sidelines” of such a market rally, and is “firmly” positioned for a market downturn.
The fund manager said 60 per cent of the trust’s capital is deployed in what he believes are “defensive” assets.
Five of the top ten holdings in the trust are UK or US government bonds. The UK government bond exposure is in in index-linked gilts, that is, bonds where the interest rate rises in line with inflation.
It has long been the view of Baillie and his colleagues that the consequence of the policy of quantitative easing and low interest rates will be a marked increase in inflation over the long-term.
The annual report of the trust confirmed Ruffer’s annual dividend could be cut this year, after already announcing a cut in the interim dividend.
The chairman of the trust said for several years the dividend had been paid partly from capital gains. The board of the Ruffer Investment Trust believe this is “not in shareholders interests.” .
The board added they wish to give the fund manager “maximum flexibility” when choosing investments, rather than having to choose investments in order to pay a dividend.
The interim dividend was cut from 1.7p to 0.9p in February, and the board stated in the annual report they will “not hesitate” to cut the full year dividend if they deem it necessary.
Despite those travails, the board of the Ruffer Investment Trust have regularly been issuing new shares and the trust trades at a premium to net assets of 1.4 per cent.
The intention is to issue sufficient shares to grow the size of the trust to £500m “in the coming years” to improve liquidity.
Another investor who is adopting a distinctly cautious approach is Peter Elston, who runs the £78.4m Seneca Global Income and Growth Investment Trust.
In his latest note to clients he said: “I am anticipating a global economic downturn in or around 2020. This, I think, would precipitate a global equity bear market, beginning some time in 2019. I might be early, but that’s better than late.