The investment managers of the Ruffer Investment Company have said the economy is in “uncharted waters” and nobody knows what is to come.
In the firm’s six month review, managers Hamish Baillie and Duncan MacInnes said a significant source of the company’s outperformance has been “not owning the frothiest areas of the market” when the cycle turns.
“Today there appears to be a lot of froth,” they said, adding that 2021 might be the year remembered for when investors tumbled down a “rabbit hole” and entered “financial wonderland”.
“The stock market went mainstream in a fashion not seen since the late 1990s," they said.
“Investors have poured more than $1tn (£73bn) into equity funds in the past 12 months - more than the combined inflows of the past 19 years.
“In short, there was an excess of excesses, and this makes us cautious.”
This means the markets and economy as a whole are in unchartered waters, they said, and nobody knows how all of this will play out.
Investors now require a diverse toolkit, as it is clear that no one asset or single strategy can guarantee success, the pair added.
"For bad market outcomes we've got the unconventional toolkit- index-linked bonds, credit protection, payer swaptions, gold exposure, and equity put options. This is what you would expect from Ruffer: a preoccupation with downside protection.
“For rosier outcomes - because there's a chance we have another roaring twenties, we've got attractively priced GDP- and inflation-sensitive equities,” they said.
The paid said where they think investors don't want to be is in the middle of the road - a resumption of the old regime of low and stable growth and inflation.
"The winners of that regime - growth stocks, long duration assets such as venture capital and renewables and conventional government bonds - look to us like they offer no asymmetry and are already pricing in victory.
“As liquidity is drained from markets these crowded trades look to us the most dangerous.”
The firm saw a 2.61 per cent share price total return in the six months to December 31, down from 9.11 per cent at the same point last year.
The firm’s net asset value rose 23.1 per cent from £576m to £709m in the six months, compared with the FTSE All-Share Index which rose 4.81 per cent.
The pair, who in July last year said that the transitory debate over inflation missed the point entirely, said their longer-term conviction is that a new regime of more persistent and malign inflationary pressures has begun, but they are unsure how this will play out.
“This means we are as worried about inflation volatility as we are a higher average level of inflation.”
sally.hickey@ft.com
