In a year end review submitted to the stock exchange today (July 19), the trust’s managers Duncan MacInnes and Hamish Baillie told shareholders that even if inflation is temporary, unless wages rise in tandem people will be financially worse off.
They said: "We think this 'transitory debate' misses the point entirely.
“Of course, house prices will not rise at 10-20 per cent annualised forever. Inflation is simply a measure of the rate of change. If that delicious beer garden pint was £4.50 in 2019 and now it costs £6, it has inflated by 33 per cent. Next year it might cost £6.25.
"The Bank of England might say 'See! Inflation was transitory, it's only 4 per cent, we told you!', but unless wages have risen by 39 per cent since 2019, you should be feeling worse off.”
The pair outlined how they were protecting shareholders’ capital with a number of hedges against inflation, in what they called their “unconventional protective toolkit”.
These hedges include inflation-linked bonds, the “natural bolthole for investors feeling the tyranny of fixed income”, as well as gold, being long in credit spreads, payer swaptions and equity puts on indices.
They added other tools included monitoring the VIX index, relative value arbitrage, FX volatility and cryptocurrencies, however these are not of “meaningful size” in the portfolio currently.
The pair warned that after a “huge recovery”, some parts of the market were showing “signs of froth” and caution was warranted.
The trust’s managers made headlines in June when they revealed they sold their indirect exposure to bitcoin in its entirety before the currency lost around 35 per cent of its value in April.
The cryptocurrency fell from a height of £45,881 on April 15 to £35,375 ten days later. On June 6 it was trading at £25,275.
Ruffer’s managers said of the asset: “The bitcoin exposure was put into the portfolio as a defensive investment, to add diversification to our inflation hedges.
"Its strong rise thereafter reflected increased institutional and retail interest, and as it hit all-time highs in April we judged its asymmetry to be much lower (and importantly the threat to gold to be lower too).
"With more attractive risk-adjusted positions elsewhere in the market we sold the remaining exposure."
The full year review showed the trust increased its share price total return by 7 per cent, rising to 19.5 per cent for the year to June 30.
NAV total return for the year was up 5 per cent to 15.3 per cent, and shareholders received a dividend of 1.9p for the 12 months.
The managers added: “The company has achieved its objective of preserving shareholder capital regardless of the market conditions. In last year's report we wrote 'we feel confident about our prospects from here' and results have borne that out.”
In June, the trust managers upped their exposure to European equities, saying the region will soon “receive the torch in the global economic growth relay.”
In a statement to the stock exchange on June 7, MacInnes and Baillie said they have been adding to European equities, expecting that as lockdowns end the assets would rise sharply.
sally.hickey@ft.com
