The CF Ruffer Total Return fund represents a microcosm of the Ruffer approach to investment, a focus on capital preservation; aiming not to lose money on any 12 month period, whilst at the same time aiming for a return to our investors suitably ahead of cash to reward them for holding risk assets. Since the fund was launched in September 2000 it has broadly delivered on these aspirations, rising by over 120 per cent and delivering a compound annual return of just over 10 per cent, compared to the distinctly disappointing 10 per cent loss (including dividends reinvested) from the overall UK equity market over the same period. Admittedly, the poor performance of the equity index owes much to the recent sharp falls in share prices, but this merely underlines the fallacy of indexation and benchmarking.
For some considerable amount of time, predating the current crisis by well over a year, we have had deep concerns over the leverage and risk appetite in financial markets. The events of the last year have revealed the full enormity of the situation. Low interest rates encouraged lax lending standards and excessive leverage across almost all asset markets, against a presumed background of prices rising in perpetuity; such loans have gone rapidly sour, impairing the very ability of banks to lend, both now and in the future. We now see that not only have our concerns proved grimly accurate, but it is far from clear that we are not necessarily further in than the second or third act of a five act drama (or tragedy). The last year has witnessed unprecedented paralysis in inter-bank markets, falling house prices and the collapse, bankruptcy, bail-out or forced merger of many once-proud financial institutions. This trail of destruction in the Western financial system is the not wholly unpredictable outcome of the gigantic leverage mania of recent years. Once again we see that when money is cheap, capital is misallocated and leveraged returns create the illusion that all are financial geniuses – at least until the music stops and reveals the chaos left behind.
More recently we have seen the metamorphosis from ‘merely’ a financial crisis into a sharp economic deceleration. We believe that the process of bank deleveraging, whereby banks rebuild their balance sheets by raising capital and reducing lending, has further to go and will continue to damage the global economy. So we continue to view the immediate future with characteristic caution. We believe that the actions of the authorities to shore up the banking system and pump liquidity into financial markets are a necessary evil to ward off the threat of a deflationary slump, though more action may well be required. Markets are almost inevitably now going to focus on fears of deflation, but this may be short-lived, and we are already looking ahead to the likely inflationary outcome of such extreme government interventions.
Accordingly the biggest recent change to the portfolio has been to increase index linked bonds to a 30 per cent holding.
As for stock markets, we have no crystal ball to tell us when the current bear market will trough, but suspect that the recent rally will be temporary and that we have further falls to come. That said, our equity exposure in the fund is now at its highest for over two years, though half of this is in Japan and gold. Equities may have further to fall, but they are certainly a lot more attractive now than they were when the market was 40 per cent higher.
The Adviser Fund Index (AFI) is made up of the recommended portfolios of a panel of leading UK financial advisers and is based entirely on the funds those firms have actually recommended to clients. The three AFI indices, aggressive, balanced and cautious, are intended to represent an ideal portfolio of funds for an individual in his 20s, 40s and 50s who is saving for a pension age of 65.
The CF Ruffer Total Return fund has achieved the best 12 month return of all the funds nominated for the Corporate Adviser Ultimate Default Fund 2008. It has outperformed the IMA cautious managed sector by over 25 per cent over the last year.