An All-Weather Trust That Backs the UK

VIDEO: Duncan MacInnes, manager of the Bronze-rated Ruffer Investment Trust, on why the unpopular UK stock market is attractive

Holly Black 10 December, 2019 | 9:48AM
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Holly Black: Welcome to the Morningstar Series "Why Should I Invest With You?" I'm Holly Black with me is Duncan MacInnes, he's Manager of the Bronze-rated Ruffer Investment Company.


Duncan MacInnes: Hi.

Black: So, do you want to tell us a bit about what the investment trust does.

MacInnes: Yeah. So, what we try and do at Ruffer is build an all-weather portfolio. So that's a portfolio that will deliver consistent positive returns regardless of whether the market or the economy is doing well or badly. And we've been doing that for 25 years. And over that time, we've annualised at about 9% after fees, which is 2% ahead of the FTSE. But what we're more pleased about, I think, is the participation on the downside. So, over that 25 years, the FTSE's halved in value twice, first in the dotcom bubble and second in the financial crisis. Ruffer's max loss is 9%. So really a capital preservation first approach is what we're all about, about trying to capture equity like returns, but with less volatility.

Black: So that recession proofing and all-weather thing seems quite relevant at the moment. I think we just found out that we're not in recession. So how are you positioning at the moment?

MacInnes: Well, today, I think the best way to think about the portfolio is that there's three legs to the portfolio stool. And like any stool, if you took one of the legs away, it wouldn't be a third less useful, the whole stool would fall over. So, the three-legged stool are 40% in equities, because we have to be honest and admit that we don't know when the cycle is going to end, no matter how bearish you might be. There's always interesting growth opportunity somewhere. So, we've got 40% of the portfolio trying to find them. We've got another leg which is unconventional protections. So those are protective assets designed to benefit from a rise in volatility or distress in markets, particularly in corporate credit markets. And then the last leg of the stool is index linked bonds. Because ultimately, we believe that the end to the current cycle will result in inflation, because inflation is the solution to the problem of too much debt. And that's why we hold inflation linked bonds.

Black: What does the unconventional assets part of that comprise?

MacInnes: It comprises mostly, of effectively a short on corporate credit markets, but also some options that will benefit from a fall in stock markets or a rise in volatility.

Black: So, within the equities portion, is there a sector or region that you're seeing more opportunities?

MacInnes: Well, thankfully, we have the ability to invest globally, so we can go anywhere, which helps. But I think at the moment, we're particularly interested in Japan, which has been a long-held position in the portfolio, but also most relevantly, I think the U.K. is very much the centre of our spotlight currently.

Black: That's quite an unpopular position at the moment. Is that proving quite frustrating to…

MacInnes: I think its unpopularity is part of the attraction to be honest. The U.K. has been shunned by foreign investors for obvious reasons. Of course, there is Brexit, but there's also the risk of Jeremy Corbyn. And I think as we move towards the election as of today, and of course, things can change, but it looks like we might get a more benign Brexit outcome than some of the worst forecasts, and we may get a Conservative government and both of those I think would be positive for U.K. stock market that looks quite cheap.

Black: While you're investing in the U.K., though, do you feel like you're treading water a bit waiting for it to play out? I just think it must be so frustrating.

MacInnes: Yeah, there is some some element of that, although because of the low valuations actually there are lots of stocks in the U.K. currently that pay very attractive dividend yield. So, you are paid to wait and what we're starting to see is the rise of mergers and acquisitions. So, I think 2018 was a record year for the number of FTSE companies acquired by foreign investors. That's carried over into 2019. So it's almost getting to the stage where if public market investors will not catalyze the value, then private equity and foreign buyers might. And we had one of them in the portfolio recently with Sophos, which is a cyber security company which was bid for by a private equity firm in the U.S. and rose 40% in a day.

Black: So, the other side to the Brexit coin, of course, is Europe. What is your opinion on the continent?

MacInnes: I think that the European market is quite closely tied to the U.K. market actually. I don't think we'll see much decoupling as a result.

Black: Not for much longer.

MacInnes: But in market terms, both are weighed down by the same factors, which are our reliance at an index level on banking stocks, for example, and commodity stocks. But also, politically, they're both tied to Brexit and both stymied as a result of that.

Black: Super. Well, thank you so much for your time.

MacInnes: Thank you.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor,