RUFFER INVESTMENT COMPANY LIMITED
(a closed-ended investment company incorporated in Guernsey with registration number 41996)
Attached is a link to the Investment Monthly Report for December 2018
During the month, the net asset value fell by 1.5%. This compares with a fall of 3.7% in the FTSE All-Share Index.
In a turbulent month our protective assets started to come into play. If we were to factor in the positive performance of the protective credit and volatility strategies, which did not price until after the month end, then the NAV would have fallen less than 1%. From where we stand a further market fall should see the Company perform well. That being said, we have failed in the last 12 months to deliver on Ruffer’s raison d’être: namely to protect capital and deliver positive returns regardless of the direction of markets. That is disappointing and frustrating to us; more importantly it has been costly to our shareholders.
Let us briefly survey what the financial historians will likely say about 2018. The most striking factor was the all-encompassing nature of the decline. Recent market volatility has not been an economic event (yet) but a financial market one: the global economy has been growing robustly with the US at the forefront. Yet a Deutsche Bank study demonstrated that more than 90% of asset classes posted losses in dollar terms for the year, a record since 1908. In December, not a single company managed to borrow money in the $1.2 trillion high yield market and it will go down as the worst
December ever for US stocks. Oil plunged 42% from peak to trough with no clear catalyst and President Trump scared the horses by engaging in trade wars and musing about firing the chairman of the Federal Reserve. For the first time in several years, Federal Reserve and Treasury communication policy hurt, rather than helped, the market.
So how is the portfolio currently positioned? We have our lowest allocation to equities since 2008, at 34%. Yet we have still sustained damage here. Our exposure was focused on cyclical businesses trading on low valuations, which we thought would best capture the benefits of economic growth. Low valuations did not soften the blow as these stocks fell in line with equity markets, but we remain confident that these investments will be well placed to capture any bounce. On the opposite side of the ledger, we have deliberately chosen to protect the portfolio from material declines, rather than buying expensive protection against bumps in the road. As such, the protective investments have only just begun to kick in, the exception being our investments against distress in credit markets: these have performed well (up around 30% over the quarter) and we would expect them to continue to deliver strong positive returns should the stresses we observe begin to manifest themselves more seriously.
Looking into 2019, credit markets are likely to be the epicentre of the next crisis, but the effects will be felt much more widely. The combination of option protection and the aforementioned credit market protection will be a powerful one and should more than offset any losses in our relatively trim equity exposure. When combined with gold starting to show signs of life and index-linked bonds likely to contribute positively, this should allow us to be greedy when others are fearful, if markets fall further.
Northern Trust International Fund Administration Services (Guernsey) Limited
Martin Bourgaize +44 1481 745552