The managers of the £1.1bn Ruffer investment trust believe a period of deflation is coming, but in a move they acknowledge is contrarian have strated to allocate increased amounts to gold and instigated a new position in a derivative that rises in value if the oil price goes up.
In his latest update to investors in the trust, Duncan MacInnes [job title], wrote that the current portfolio is “somewhat positioned for a disinflationary lurch on the inflationary journey, bond yields coming down and a bumpy recessionary landing".
He added: "We are waiting for the opportune moment to pivot towards a portfolio positioned for higher nominal growth alongside inflation and financial repression – but it’s not yet. So there is a degree of what appears to be cognitive dissonance in our portfolio construction, because the portfolio we believe you want for the coming six to nine months is almost entirely different from the strategic portfolio you might want to navigate the coming decade.
"The risk is we are trying too hard; the danger is, by not trying to navigate through choppy markets, investors could get hurt.”
He said he expected 2023 to be an “uncomfortable” year for investors, with great uncertainty around the outlook for the US economy and the persistence of inflation, with the latter meaning interest rates continue to rise.
The alternative, according to MacInnes, is that a recession happens quickly in the US, and so interest rates do not rise.
Ruffer’s long-term view is that inflation will be persistently higher in the coming years than it has been for much of the past decade, but that a shorter period of very low inflation could be imminent.
With that in mind, they currently have their lowest ever exposure to equities, at 12 per cent, while gold accounts for around 5 per cent and an oil price ETC at around 3 per cent of the portfolio.
Equities may be expected to perform poorly during a period of recession, while gold and oil may be inflation hedges.
David Jane, a multi-asset investor at Premier Miton, is relatively cautious on the outlook for oil companies right now, as the oil price has fallen, but instead believes equity returns may come from commodities as demand picks up as a result of China re-opening.