The managers of the £395m UK-based trust, and the wider Ruffer business, had maintained a very cautious outlook for global stock markets since the financial crisis, with the five largest investments being in government bonds.
But Hamish Baillie, lead manager of the trust, said while his worldview hasn’t changed, he acknowledged that the decision to buy US equities now is a "tactical shift" for the trust.
Mr Baillie said the announcement by the US Federal Reserve at the start of the year that it would pause further interest rate rises caused him to buy equities, while not changing his longer-term view.
The manager's view has been that record low interest rates and quantitative easing would inevitably lead to very high inflation, and central banks would put interest rates up as a result.
He said the build up of debt in the global financial system hasn’t been addressed, and in consequence, when interest rates rise, it would cause an economic crash, and so equities would be a bad investment.
Ruffer’s worldview appeared be vindicated in the final quarter of 2018, as higher US interest rates caused investors to panic, and sell equities.
But in his latest update to shareholders Mr Baillie wrote: "The volte-face from the Federal Reserve on interest rates may have materially changed things in the short run.
"We see their actions as a promise, not just to refrain from taking away the punch bowl, but also to proactively encourage investors to party a little harder.
"The political debate in the US is gravitating towards highly stimulative policies such as modern monetary theory and job guarantee schemes. In response, we have let our equity weighting drift up to above 40 per cent whilst the sun is shining."
He added: "This environment has buoyed risk taking and encouraged complacency: volatility selling is back, credit spreads have been crushed, currency markets are somnambulant and billions of bonds trade on negative yields.
"The equities which are working are the ones playing the games which define this particular cycle: the FANGs, technology and those favouring corporate finance solutions such as buybacks or acquisitions over capital expenditure and investment."
A major difference between the worldview held by Ruffer and events over the past year is that while US interest rates have risen, inflation has not, meaning there is a limit to how high interest rates need to go.
Simon Edelsten, who runs about £400m across the Mid Wynd investment trust and the Artemis Global Select fund, said: "High quality growth stocks can continue to give good investment returns as long as equity markets do not re-rate across the board.
"The biggest risks of that tend to be from inflation taking off, which seems unlikely just now – indeed more steady economic growth has lowered that risk – thus the US policy change."
He said he is more concerned about the valuations of stocks than the macroeconomic environment.
But Peter Elston, chief investment officer at Seneca, said the policy shift by the Federal Reserve was less significant and did not alter his view.
He said: "There are two ways you can look at the Federal Reserve’s decision to pause interest rate rises. The first is, it is just a pause and then they raise again, in which case the performance of equities could continue, but the alternative view is that they are not putting rates up because they are worried about the economy, and that might mean the economic downturn is closer at hand."
He has responded to this by investing in gold funds across all the different funds at Seneca.
David Scott, an adviser at Andrews Gwynne in Leeds, agrees with Mr Elston’s analysis.
He said: "The UK economy can’t take interest rates at one per cent, the US economy can’t take rates at 2 per cent, and there are zombie companies all over the world that would go bust if rates go up. The global economy is in a very poor state."
Mr Scott’s clients all have at least 5 per cent invested in gold, which he described as "the ultimate diversifier.
david.thorpe@ft.com
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