Positioning a portfolio for a variety of economic outcomes is not easy, which is why many investors turn to ‘multi-asset’ investments that contain a variety of different areas. These benefit from diversification, and some also employ ‘protection’ strategies, which can guard against the worst of market falls.
Over the past few decades, a traditional ‘60/40’ portfolio – 60% equities and 40% bonds – has done a good job of providing decent returns while ironing out volatility. However, that may not always be the case. The diversification benefits of bonds may be waning with yields so low and prices high. A bond sell off could coincide with a slide in share markets, for instance if both are spooked by rising inflation. Therefore, a more sophisticated approach could work better.
One option in this regard is Ruffer, a flexible multi-asset investment trust that seeks to achieve a total annual return, after all expenses, of at least twice the Bank of England Bank Rate. It combines conventional asset classes – global equities, bonds, currencies and gold – with the use of derivatives strategies that serve as protection and an allocation to an internal ‘illiquid strategies’ fund, which currently includes Bitcoin exposure. The balance of different assets is designed to cope with a variety of economic scenarios.
Managers Hamish Baillie and Duncan MacInnes seek to anticipate future risks to capital rather than be reactive. The team has been successful in navigating the major crises in the 21st century thus far, namely the Dotcom Bubble, the Global Financial Crisis and, most recently, the Covid crash. The strategy is dependent on the managers’ ability to interpret the macroeconomic environment and identify effective protection to market shocks in an era of inflated asset prices and high correlation.
The portfolio is currently centrally positioned for an inflationary environment, driven by the team’s views. This underpins the decision to hold assets such as cheap economically sensitive equities and index linked bonds. Equities account for about 40% of the portfolio and are heavily biased towards the UK and Japan. While there is a value tilt to this, the managers favour ‘quality franchises’ and avoid distressed or highly indebted businesses. Index-linked bonds represent about a third with gold (and gold equities) accounting for 6%. The remainder is split between cash and the ‘illiquid strategies’ component.
An environment of continued low or negative interest rates and weak global growth would be an ongoing headwind to the strategy. It should also be noted that the overall portfolio will still often carry a positive correlation to risk assets such as equities, despite having diversification benefits.
The trust’s exposure to Bitcoin is somewhat controversial, but we don’t think investors should be overly fixated on it. Estimated at 2-4% of net asset value, the managers have been trimming exposure as the price has risen in recent months. It is kept in offline cold storage in a segregated account by the world’s largest digital assets custodian. Ruffer see it as an asset that blends the benefits of technology and gold, and that it could benefit from the current economic climate.
Given where government bonds trade today it’s harder to make a case for them offering familiar defensive qualities in future ‘risk off’ environments. We think this enhances the importance of Ruffer’s various forms of protection, and this Trust could be worth considering as a more stable ‘core’ holding in a portfolio.
The Ruffer team have an excellent long-term record of balancing capital preservation and growth, and the Covid crisis proved a reminder of the power of their protective approach. Their derivatives strategies came to life in early 2020, offering a rare source of positive returns in a stressed and volatile environment. However, this part of the portfolio will likely be a drag on returns when markets are benign.
The trust is now positioned for a pickup in inflation, so it could blend well with investors’ more growth-biased equity allocations. We recognise it as an important source of defensiveness and diversification and are pleased to add it to the Direct Investment Service Preferred List, our list of preferred funds for new investment across the major sectors.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.