Not long ago, investors enjoyed a sense of certainty, believing that the big-tech trade would keep leading the market and expecting former President Donald Trump to win the upcoming election.
However, things have changed. The market is shifting from tech-based momentum trades to the previously unpopular small caps. Investors who bet on the “Trump-trade” now face a higher likelihood of a Democratic victory after President Joe Biden quit the race.
This environment of heightened volatility and uncertainty is precisely what Ruffer Investment Company has prepared for. The London-based fund is cautious about equity market valuations, especially in the U.S., and anticipates global inflationary pressures and increasing fiscal deficits to harm bond prices, pushing yields higher.
“The risks of a correction in equity and credit markets [is] high given the level of real interest rates alongside the uncertainty driven by elections, central bank policy decisions, liquidity risks, and a softening U.S. economy,” says Ruffer in its fiscal year-end review.
Ruffer’s portfolio includes what it calls deeply unloved “ugly ducklings.” These assets, often shunned by investors, have the potential to mature into valuable investments. Among the ugliest ducklings are Chinese shares, which are under-owned due to reputational risks. Ruffer finds these equities attractive because they are among the cheapest globally, despite their bad news being priced in.
Ruffer allocates only a quarter of its funds to stocks, with Chinese equities making up around 4% of its portfolio. U.K. equities account for 11.2%, benefitting from low valuations and the potential for a re-rating driven by a stable new Labour government, increased pension fund stock holdings, and foreign takeover interests.
Precious metals miners are also part of Ruffer’s portfolio, with 4% in gold mining equities and another 3% in silver and platinum. Ruffer sees value in this sector due to geopolitical concerns, inflation worries, and a desire to avoid taxes. They believe earnings revisions in the sector could be spectacular if gold prices rise significantly.
Ruffer also holds a long position in the Japanese yen, viewing its current valuation as an “historic opportunity” and expecting the yen to benefit from its haven status when markets are volatile.
Finally, U.S. treasury inflation-protected securities (TIPS) and UK inflation-linked gilts make up 19% of Ruffer’s portfolio, reflecting the fund manager’s concerns about persistent inflation. Investors can currently secure a return of inflation plus 2% by lending to the U.S. for the next 10 years, which Ruffer considers a sensible core holding for capital preservation.
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