InvestmentsOct 6 2021

Ruffer: equity and bond split potentially high risk

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Ruffer: equity and bond split potentially high risk

The chairman of the Ruffer Investment Company (RICL) has warned an equity and bonds investment combination is no longer a low risk approach in the current economic climate. 

In the firm’s annual report released this morning (October 6), Christopher Russell said although an equity and bonds combination has traditionally been a low risk approach to investing as the two are inversely correlated, that may no longer be true, as interest rates rise and monetary policy begins to tighten. 

He said: “The nominal annual return is not the only important performance metric. A given return with little volatility will grow more wealth over time than the same average return with greater volatility. 

“Furthermore, a relatively low correlation between RICL and other asset returns helps reduce the volatility of a portfolio which contains RICL shares. 

“And whereas an equity/bond combination has traditionally been a low risk approach to achieving the same outcome, that strategy is now potentially high risk because future returns from bonds and equities are likely to move together when interest rates rise as central banks begin to tighten monetary policy.”

The trust saw a net asset value total return of 15.3 per cent for the year to June 30, with a share price total return of 19.5 per cent.

On that date, it was trading at a 2 per cent premium to net asset value, compared with a 1.5 per cent discount in 2020.

Russell warned the rising inflationary environment may prove to be a "generational event" in terms of wealth distribution.

He said: "In the last six months the threat of inflation has taken centre stage amongst the commentariat and investment community and the company is positioned to protect investors against what may prove to be a generational event in terms of wealth distribution.

"Concern over inflation explains the high proportion of the RICL portfolio invested in real assets such as index-linked bonds and gold-related securities."

However, he added that given its position outside government control, Bitcoin was also "intriguing".

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.

"Government-issued currency has a long history of depreciation of value in relation to goods and services," Russel said.

"Bitcoin may fall in value for other reasons, but as an asset sitting outside the fiat money system it is an intriguing prospect as a digital version of gold."

Last month the firm launched a daily liquidity version of its £4bn Total Return fund in response to the "uncertain future" faced by financial markets.

In a statement released on September 9, the firm said the new fund - its first fund launch in ten years - will adopt the same investment approach as its existing four core funds, aiming to generate absolute returns with an “uncorrelated risk/return profile to the broader markets”.

sally.hickey@ft.com