In the trust’s monthly investment report, the managers said the allocation to the asset class, which it called a “core holding” in the trust, was the “largest detractor to performance” in January.
Ruffer trust endures ‘worst year in history’ as ‘protective toolkit’ fails to deliver
According to data from FE fundinfo, the trust’s total return fell 3.5% for the month, a bigger drop than the average IT Flexible trust’s 0.1% loss.
The managers explained that it had increased its allocation to gilts at the end of 2023 after it felt “yields had fallen too far, too fast” given the trust’s concerns over the “likely stickiness and volatility of inflation”.
Ruffer defended the UK TIPS position, arguing the volatility in 2024’s opening month was “temporary” and did not alter its stance on the asset as a “core element of our long-term inflation protections”.
Ruffer cuts bond and equities exposure after ‘complacent’ market rally
The trust’s managers said the backdrop in bond yields, especially in the UK, had created the drag after bonds stumbled at the end of 2023 as interest rate cuts and growth expectations were reduced.
“Global asset markets started the year almost unanimously priced for a perfect soft landing, following the strong rally in both equities and bonds into the year end,” Ruffer said.
“This left scope for disappointment in January if either assumption of early interest rate cuts or steady growth were dialled back.
“In the end it was bonds that gave way as doubts emerged over the speed of likely US rate cuts, whilst equities in aggregate continued to make gains.”
Jonathan Ruffer notes ‘down year’ despite AUM and profits jump
Ruffer pointed to the ongoing tensions in the Middle East creating a 6% spike in the oil price, and freight costs rising sharply to more than double the post-Covid low seen in October 2023.
Both events created further market volatility, but Ruffer argued it has had “no impact on inflation expectations, with markets now convinced that this dragon has been slain”.
Ruffer said that the UK TIPS call was made in order to “add risk into portfolios through a significant increase in bond duration in the final quarter of 2023”.
“We took the profits on this position by the year end, adding instead to our net equity exposure this month, in light of continued US economic resilience.”
Macro questions remain
Looking ahead, the managers said the “big questions for investors remain unresolved”.
“Most equity markets have now recovered their 2022 losses and are increasingly priced on the assumption that inflation will fall to target and stay there, without a decline in profit margins or economic growth,” they wrote.
“Bond markets appear to be more realistically pricing in a regime of higher interest rates, even if they show periods of over optimism.
“Has the Fed ‘put’ now been restored, with the central bank free to cut rates if growth falters, or will sticky and volatile inflation leave them facing more difficult choices? In other words, are equities and bonds still positively correlated or have we returned to the ‘Goldilocks’ conditions of the pre-covid era?”
Ruffer said it remained “unconvinced that inflation has vanished for good and that there will be no lasting impact from higher interest rates”, which it interpreted as “protection” remaining a key portfolio allocation going forward.
