Has the perfect storm hit financial markets in the first quarter of 2022?
It is hard to be positive given what we have seen thus far. January was dominated by concerns over interest rates and inflation, while February and March took a sinister turn from a humanitarian perspective as Russia invaded Ukraine.
Year to date, global equities are down more than 10 per cent and it would take a very brave person to assume we are anywhere near the bottom.
What worries me most is this challenge really is a bit different to anything we have seen recently. When markets fell previously, professional investors would open their trusty playbook of buying (and buying heavily) because they knew the Federal Reserve would support them – we saw this at the height of the Covid sell-off in 2020.
Unfortunately, things have changed and that makes buying the current dip particularly dangerous. Inflation means the Fed is now against you and the situation in Ukraine is only going to make that picture worse in the short term.
I think all of us would take a nice, single digit return in 2022, given all of the uncertainties. But choosing a fund to get there is no easy task.
This week’s best in class fits the mould as a core, defensive holding. The LF Ruffer Diversified Return fund aims not to lose any money on any 12-month rolling basis, with a strong emphasis on providing genuine protection in times of market stress by investing across equities, bonds, derivatives and currencies.
The fund is an extension of the wider Ruffer investment strategy, which has an exceptional long-term track record, returning 9 per cent on a net annualised basis to investors since 1994. The proof is in the pudding with the strategy historically outperforming in volatile periods – such as the dot.com bubble, the credit crunch and, most recently, the global pandemic.
Managed by investment directors Duncan MacInnes and Ian Rees, the rationale behind this launch was to respond to a growing number of investors who wanted access to the strategy, but required greater liquidity and daily dealing. The existing strategy dealt on a weekly basis, so this product was launched with some slight adjustments (such as not holding Ruffer’s own multi-strategy funds) to provide a more liquid investment vehicle.
Beyond this, the process is unchanged. It starts at the investment strategy and asset allocation stage, where Ruffer founder Jonathan Ruffer and chief investment officer Henry Maxey identify potential risks and opportunities when building a portfolio of core protective and growth assets – these are then communicated to the wider team.
The second stage is fundamental analysis, which involves the 30-strong research team covering both macro-economic and company-focused security selection. Within that stage you could have standalone, stock ideas (undervalued securities), but you also have ideas that are very much driven by the prevailing macro factors of the economy.
The third stage is portfolio construction – which brings together the first two stages – the final portfolio will consist of between 60 to 80 equities and 15 to 20 bonds.
Ruffer describes their own investment style as being like “riding a tractor on the motorway, plodding in the slow lane”. This fund will lag if markets are performing strongly, but it will perform when markets become more volatile or uncertain.
One facet I particularly like is the business takes risk management a step further by constantly looking for the Achilles heel of the portfolio. For example, the team will look at the previous 100 years of financial data and will run the portfolio against that historical data to see what environment would have resulted in a loss of money.
This fund has already demonstrated its resilience by returning 6 per cent since launching in September 2021 – by contrast global markets have fallen 6 per cent. Ongoing charges stand at 1.13 per cent.
Sitting in the much-maligned Investment Association Targeted Absolute Return sector, this fund stands out as an ideal solution for risk-averse investors. The wider Ruffer strategy has delivered precisely what it has promised in the past three decades and there is no reason why this fund cannot do exactly the same.
Darius McDermott is managing director of FundCalibre
