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Resilience key as Ruffer prepares for inflation volatility

Ruffer LLP's single strategy approach, which is a multi-asset class, diversified fund seeking to deliver consistent returns and limit drawdowns in every market cycle is increasingly rare in an environment dominated by thematics.

Ruffer LLP’s single strategy approach, which is a multi-asset class, diversified fund seeking to deliver consistent returns and limit drawdowns in every market cycle is increasingly rare in an environment dominated by thematics.

The group has long been advocating for portfolios to be more prepared for inflation and an unwinding of the stimulus that has occurred in recent years, with few heeding their calls. In this month’s update, in which the strategy managed a positive net result, despite decreasing their equity exposure into the recovery, the group once again questioned the idea that conventional bonds will continue to ‘act as a safe haven’ to ballast portfolios.

“Operation Stable Door began in earnest during March as the Federal Reserve raised interest rates for the first time in four years to try to contain inflation running at a near-half century high of 7.9%” they explained. The result was global bonds enduring the ‘worst quarter ever’, “despite war, pestilence and growing fears of a recession” all of which would generally see investors flock to ‘duration’. 

Whilst the fund reduced its total equity exposure down to 35 per cent during the quarter, the combination of underappreciated inflation hedges ranging from gold to inflation-linked bonds, meant the strategy was able to deliver positive returns in every month during the quarter. Something that can’t be said for most equity, bond or even traditional balanced portfolios.

The UK-based group has been somewhat aggressive in their use of inflation or index-linked bonds, which represent more than 30 per cent of the portfolio in March, which underperformed as bond yields increased faster than inflation. Interest rate options, on the other hand, delivered solid profits as bond yields rose. Despite the short-term events, they remain confident that “long linkers remain a key holding for the world we are heading into”, that being one of greater uncertainty and inflation volatility.

Turning to their growth allocation, their view is that “equity markets look increasingly complacent” having all but recovered the losses stemming from the Ukraine war. This is now being reversed as the corporate earnings season pushes US markets lower. Key drivers of outperformance were an increased exposure to the energy and material sectors, with BP, Shell and Bayer among the largest direct equity allocations, and a lower weighting to the US (just 6 per cent of the portfolio). Similarly, a now 10 per cent allocation to gold and gold miners was the single largest contributor during March. They also added 2% to gold bullion exposure over the month.

In World War II, America was famously dubbed the ‘great arsenal of democracy’. In the era ahead, Australia looks set to be the ‘great arsenal of commodities’ for western democratic states. On top of this, Australian pension funds may soon start to close their net short position in their domestic currency, adding a further kicker to the Aussie dollar. Their 5% allocation to AUD was funded from the US dollar.

Concluding they say “near-term the path ahead remains highly uncertain – as ever, we aim to be resilient whatever happens. We believe we have the right asset mix to deal with the challenges and capture the opportunities in this new regime.”