RUFFER INVESTMENT COMPANY LIMITED
(a closed-ended investment company incorporated in Guernsey with registration number 41996)
LEI 21380068AHZKY7MKNO47
Attached is a link to the Investment Monthly Report for July 2019.
http://www.rns-pdf.londonstockexchange.com/rns/3134I_1-2019-8-7.pdf
During July, the net asset value of the Company rose by 2.3%. This compares with a rise of 2.0% in the FTSE All-Share index.
For the last two months we have witnessed a rising tide that has floated (almost) all boats. Index-linked bonds, equities and gold all rose in value. Credit protection and options acted as a small drag on returns reassuring us that this part of the portfolio will perform (as it did at moments in 2018) if the tide turns.
In this topsy-turvy world it was deteriorating news on the economy that resulted in the latest leg-up in asset prices. If that sounds perverse then that is because it is perverse. Recession fears have put pressure on the Fed and the European Central Bank to cut interest rates and restart stimulus programs. As well as pushing up most asset prices this has also resulted in a record number of bonds trading at negative yields ($14tr and counting). Investors and savers now have to pay the borrower for the privilege of lending money. Welcome to the world of NIRP (Negative Interest Rate Policy).
How do we rationalise this? The fear that stalks central banks is low and persistent deflation - when interest rates reach the zero bound it becomes harder for central banks to stimulate the economy because their main tool (control of nominal interest rates) loses its potency. Their options are either to push harder on the accelerator of what were once considered unconventional measures (think Quantitative Easing et al) in order to push down real interest rates or turn to politicians for some form of fiscal stimulus. We are currently seeing the former in action.
So how do we guide our shareholders through this upside-down world? Firstly we must keep our eyes firmly on the horizon. The most dangerous words in the investment world are 'this time it's different' - it rarely is but of course it can be until it isn't! These things can go on longer than seems logical, but can also unwind quickly and the herding in markets at present makes this highly likely. How could this unravel? Central banks may overshoot and be forced to tighten as inflationary pressures pick up (much like late 2017 and early 2018). Alternatively there could be an exogenous shock to markets (no shortage of candidates there - trade, Middle East tensions, Brexit) while fundamentals remain weak. The latter is the more proximate risk because markets may jump to the conclusion that while central banks can pump up asset prices in the short term they are impotent when it comes to reviving the economy. What instruments do you want to hold for this sea change? Credit protection (held through credit default swaps for us) have a role to play, as do the real assets of index-linked bonds and gold in case central banks overshoot. If the party continues then equities will drive our returns. This formula has worked reasonably well this year as we have made a mid-single digit positive return so far with plenty of protection in place, but there will be tougher times ahead.
Enquiries:
Praxis Fund Services Limited
Shona Darling
DDI: +44(0)1481 755528
Email: [email protected]
