The second half of this year is going to be a particularly dangerous period for investors and no allocation to risk will escape repricing, the investment manager at the Ruffer Investment Company has said.
In a year-end review released this week (July 18), Duncan MacInnes said it is important to highlight the distinction in investing style needed for the current economic environment.
“Investing for inflation and investing for inflation volatility are not the same thing and conflating the two will be costly,” he said.
MacInnes said this has been proven in the cost to the portfolio of holding inflation-linked bonds, which was 3.5 per cent overall with the longest dated 2073 issue down 51 per cent.
“We have long called these assets the 'crown jewels' in our portfolio due to our conviction that they should provide the perfect protection in the world of financial repression we are entering,” MacInnes said.
“We are still of this view. But the sensitivity to rising rates we have warned about, has now been felt.”
The Ruffer Investment Company saw a share price total return of 5.6 per cent in the year to June 30, compared with 19.5 per cent last year.
The annualised NAV total return since inception in 2004 is 7.7 per cent, though MacInnes warned of the “unusually challenging” period for investors.
“The 60/40 portfolio is down 16 per cent so far in 2022, a clear indicator that balanced, multi-asset portfolios are struggling.”
MacInnes said the company has moved into “crouch mode” in anticipation of a tricky second half of the year.
These readjustments include reducing equities to a 25 per cent weighting with hedges on top, the lowest weighting for Ruffer portfolios since 2003, increasing portfolio duration given the rise in bond yields (which MacInnes said had increased its potential effectiveness as a hedge)m and rotating gold exposure from equities to bullion.
He quoted American businessman Charlie Munger, saying 'If you're not a little confused about what's going on, you don't understand it'.
“That sums up the fog of war, literal and metaphorical, we find the global economy immersed in,” he said.
Though Ruffer has never had higher conviction on the long term, the outlook for the short term is “far murkier” and dependent on how well policy makers navigate the pressures and avoid either a wage-price spiral or a recession.
“Central bankers resemble quivering funambulists facing an impossible tightrope walk as they try to meet their objectives - full employment alongside low and stable inflation.”
MacInnes paid tribute to his colleague and co-manager Hamish Baillie, who announced earlier this year that he will retire.
“In the last few years as a partner and co-manager he has been an effective sounding board, an astute moral compass with consistently good judgement. If the measure of a good man is to leave those around him better than he found them, then Hamish Baillie is undeniably a good man.”
Last year Ruffer launched a daily liquidity version of its £4bn Total Return fund in response to what it called the "uncertain future" faced by financial markets.