Former Ruffer manager: investors are too bullish

Shortly after filming our Insider Interview video, it was announced that Duncan MacInnes, co-manager of Ruffer Investment Company (LSE:RICA), had left the firm “with immediate effect”. The interview took place on 6 February, just a few days before the announcement on 12 February. MacInnes had co-managed the investment trust since September 2016, having joined Ruffer in 2012.

In the interview with interactive investor, MacInnes explains why he thinks investors have not been this bullishly positioned in 25 years, gives his take on the valuations of the ‘Magnificent Seven’ US technology companies, discusses how Donald Trump’s policies could impact financial markets, and names two ‘ugly ducking’ investments he thinks will pay off in time.

Alexander Chartres and Ian Rees will join current portfolio manager Jasmine Yeo to assume responsibility for the management or Ruffer Investment Company. Yeo has been co-manager since October 2022. Chartres joined Ruffer in 2010 and is a lead manager on Ruffer’s Total Return and Absolute Return funds, the former since 2019. Rees joined Ruffer in 2012 and has been a lead manager on Ruffer Diversified Return fund since 2021.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. In the studio I have with me Duncan MacInnes, manager of the Ruffer Investment Company. Duncan, thanks for coming in today.

Duncan MacInnes, former manager of Ruffer Investment Company: Thanks for having me again.

Kyle Caldwell: So, Duncan, your view is that investors have not been this bullishly positioned for 25 years. Could you explain why?

Duncan MacInnes: Yes, it’s kind of a bold statement I made in the annual report. I would start with valuations. Valuations are egregiously high, particularly in the US. The rest of the world is a different conversation, but the US is 75% of the MSCI World, so let’s look there.

Whether you look at price-to-earnings or price-to-sales, price-to-book, the Q ratio, the Cape ratio, the market cap, the GDP, it doesn’t really matter what valuation metric you look at. Stocks are in the top one or two percentiles of historic observations in the last 50-odd years, and that would suggest - valuations are very predictive of future long-term returns - that those long-term returns over the next decade or so are going to be pretty disappointing. So, low-single digits, maybe even zero over a decade.

But valuation doesn’t tell you a huge amount about the short term. That’s the frustration of using valuations. So, what you can look at instead are things like positioning, sentiment, and whether there are examples of frothy behaviour. And I think there you can see quite a lot.

So, if you look at positioning, you start with professional investors. The Bank of America fund manager survey is always a good place to look every month, and that shows you that investors have gone from record underweight equities in September 2022 to record overweight equities as of December 2024. So, a huge wall of worry has been climbed there and that overweight equities has been funded by a now record-low cash balance, which is interesting when rates are 4% or 5% that professional investors would have low cash.

If you then move on and look at retail investors or households, the Federal Reserve publishes data that shows 41% of US household net worth is now exposed to the equity market. That is an all-time high. When were the previous all-time highs? 2021, just before the market fell 20% in 2022 and 1999 at the peak of the dotcom bubble.

Because we know, unfortunately, that retail in aggregate tends to buy most at the top and less at the bottom. There are also surveys showing retail investor sentiment is at 40-year highs. There’s a great study from Natixis, the French bank, which shows that the underlying clients of financial advisers are expecting 15.6% real on their investments over the long term, although, that’s two to three times what is a reasonable expectation.

So, I think when you when you look at that, plus anecdotal things like the banana that sold for $6 million (£4.7 million) or Warren Buffett's accumulation of $300 billion worth of cash in Berkshire Hathaway, that’s what tells us that this is a time where investors are pretty over their skis and have driven valuations up to levels that they might subsequently regret.

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Kyle Caldwell: You touched on the US stock market. Of course, over the past couple of years we’ve seen the US stock market become more concentrated due to the strong share price gains for a small number of technology companies, the so-called Magnificent Seven. What are your thoughts on the Magnificent Seven in terms of their current valuations? And could the US stock market at some point suffer a heavy fall?

Duncan MacInnes: I think the US stock market is definitely the epicentre of our concerns and that's where this concentration issue becomes a problem. The rest of the world may look much more attractive on valuations, but the US is now so big, the concentration runs at several levels. The US is 74% of the MSCI World, and then within the US you have this huge concentration within the Magnificent Seven, which I think is now getting towards 30% of the index, and then the tech sector more broadly, something like 40% of the index. So, the concentration is a problem.

The Mag Seven are great businesses, but they do at least have the potential to fulfil all that they have promised. They do have the ability to create new business lines out of nothing. I would actually focus my concerns elsewhere. So, it’s not like the US market isn’t expensive if you strip out the Mag Seven. You can find examples of other businesses that we don’t have an investment in, like Walmart Inc (NYSE:WMT), which is trading on 40 times earnings, Costco Wholesale Corp (NASDAQ:COST) , which is trading on 50 times earnings. These are 2% earnings yields for businesses that almost by definition are boring. They're not trying to grow fast. They're trying to be GDP-plus businesses. So, that’s a very high valuation at a time when you could earn 4% or 5% in the bank or 2% in a Treasury inflation-linked bond.

If we go back to the Mag Seven, this is part of this broader theme of US exceptionalism. The US has the best companies in the world, the US is the most capitalist system. All true, but one of the consequences of being the most capitalist system is relentless competition. If you’re one of the biggest companies in the world, you have a target on your back. Everyone is trying to steal your market share, your profit pool, and so you have this really Darwinian dynamic that plays out every year. I have the slide in my deck at the moment that shows the biggest 10 companies in the world at the end of each decade, by market cap.

At the end of the 1980s, it was dominated by Japan. At the end of the 1990s, it was US tech exceptionalism version one. So, Cisco Systems Inc (NASDAQ:CSCO), Dell Technologies Inc Ordinary Shares - Class C (NYSE:DELL), Microsoft Corp (NASDAQ:MSFT). Then at the end of the 2000s, it was the BRICs: Brazil, Russia, India, China.

Today, it’s all about the Mag Seven, and what that shows you is the markets are incredibly cyclical and fashion-driven. If we cut that list again in five years’ time, it’s quite likely, I think, that some of them will have dropped off. And if they drop off, that means they’ve underperformed the index, and the things that replaced it, have outperformed the index. So, really, if you know what’s going to be the top 10 biggest companies in five years’ time, please write in and let me know because that would be good.

But maybe the first chink of that happening was this DeepSeek with NVIDIA Corp (NASDAQ:NVDA). If people thought that US AI was unassailable, its advantages were unassailable, and then all of a sudden over a weekend, we found that it might not be quite as simple as that.

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Kyle Caldwell: Sticking to the US, Donald Trump has, of course, returned to the White House. How do you think his policies and particularly the introduction of tariffs will impact financial markets?

Duncan MacInnes: Yeah, well, that’s a huge question, and he’s already hitting us with what are called ‘tape bombs’. So, every time he tweets, the market has to sort of overreact to whatever he said. I think the market is clearly pretty excited about Trump too, and what that might mean for business, for the stock market and the US economy.

I think it’s also fairly clear that Trump injects a lot of uncertainty. He widens the range of possible outcomes from here, and I think that includes some really good ones, but it also includes some really bad ones. He’s far less predictable than the more conventional reaction function that you would expect from politicians like Keir Starmer or Kamala Harris or Joe Biden.

So, the market has quickly said what happened under Trump 1.0, let’s rerun that playbook. And, of course, that was very good for markets, and markets have rallied since Trump won. But I would just emphasise that that’s a reasonable starting point, but from here, we’re in a very different place to where we were in 2016.

In 2016, the US was grappling with low inflation and low growth. The macroeconomic buzzword of the time was ‘secular stagnation’. That’s what people thought the US was facing. Today, Trump’s inheriting an economy that’s firing on all cylinders, has very low unemployment, has good wage growth. He has inherited double the national debt he got in 2016, it’s now $36 trillion. He has a large and structural deficit, he has inflation that’s a problem, and he has asset prices that are already very high and tax rates that are still low from where he cut them the first time around.

So, I don’t want to underestimate what he and his team are capable of, but I think he’s inheriting a much, much better situation, so it’s harder to improve it.

Kyle Caldwell: You have around 30% in equities. Given your wealth preservation strategy, is there an upper limit in terms of how much you would hold in equities and what would need to happen for you to be more bullish and increase exposure to equities?

Duncan MacInnes: If you look at the history of the firm, the equities have, for the vast majority of the time, been between about 30% and 60%. So, we were as high as 60% in 2013, and within that you can have different regional allocations, different sector allocations, higher beta, lower beta, so they can behave differently. But I think that 30% to 60% covers 95%-plus of historical examples. So, we’re at the lower end today because of the valuation concerns that I’ve raised.

The first thing that would change that would, of course, be a change in valuations, that would be nice. But I think also we have to be open-minded to a change in the policy context. So, a big change in the fiscal stimulus or the fiscal situation, a big change to the way that monetary policy is being run. It’s entirely possible that Trump will meddle with the Federal Reserve. Depending on how that looks, that may change our view. But I really think the weight of valuations being as high as they are, is large, and therefore you need a very good reason to take lots of equity risk today.

Kyle Caldwell: You’ve described many of your holdings as ‘ugly ducklings’ - undervalued, unloved and cheap. Is there a particular ugly duckling that stands out for you in the portfolio at the moment?

Duncan MacInnes: The key point with the ugly duckling comparison is that in the fairy tale, the ugly duckling turns out to be a beautiful swan. So, they are ugly ducklings today, but hopefully they will redeem themselves and make us lots of money. On the growth side of the portfolio, I would probably highlight our investment in a basket of Japanese restructuring stocks.

What we've done there is look for companies that have very large cash balances that have cross shareholdings, that have activists on the register that are part of this theme, that's now been going on for four or five years, of the Tokyo Stock Exchange, forcing companies to rationalise their balance sheets and to try to improve their returns on equity. We think that’s a really exciting theme.

Then, on the protection side of the portfolio, I would point to credit protection or credit spreads. This is something we’ve used very effectively in the past in 2020 and, in 2022, was a really big positive contribution to the portfolio then. This is effectively betting that corporate borrowing spreads will get wider and that tends to be correlated with a risk asset sell-off. So, when risk assets sell off, this asset appreciates in value.

Today, those spreads are very, very tight. So, they’re as tight as they were just before Covid, and they are as tight as they were just before the dotcom bubble. So, we see a huge amount of asymmetry there where we can hopefully make a lot of money if things go our way and markets deteriorate. But the cost of holding it is pretty low relative to the return that we might make. So, the risk/reward ratio is very good.

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Kyle Caldwell: I also want to ask about bitcoin. Now, I know it's a position you've not had for a couple of years, but when you had the position, it created a lot of headlines and you made a big profit out of it. Given that the bitcoin price has risen significantly since when you sold, do you regret selling when you did, and would you ever return and have bitcoin exposure again?

Duncan MacInnes: We bought in November 2020 at $15,000 and we exited in the second quarter of 2021. So only four or five months later at about $50,000 on average. And the last we sold was in the $60,000. So, since the summer of 2021, clearly bitcoin has gone from $60,000 to $100,000. But I would remind you that it went via $18,000, I think when FTX when went bust, and I think that was November 2022. So, yes, bitcoin is up 60%, but in a very volatile, extremely volatile fashion.

Actually, over that same period, gold has probably done something similar, which is unexpected. I would say bitcoin is a bull market that everyone’s talking about. Gold is a bull market that nobody’s talking about. Crypto is now very big; the total market cap of crypto is about $3.5 trillion and bitcoin is $2 trillion of that. So, I think you have to look at it now. It’s also the epicentre of so much of the froth and speculation that gives us pause for thought at the moment.

So, I think bitcoin is proving itself as an asset that is here to stay. But really my concerns focus on the rest of crypto, that other $1.6 trillion which is filled with bubble-like behaviour. There’s more than 100 cryptocurrencies that are valued at north of $1 billion. That’s where Justin Sun bought the $6 million banana and made his money. I think that most of that will end up being worth almost nothing, and that looks pretty bubbly to us. Therefore I think we’re unlikely to revisit bitcoin until that situation changes.

Kyle Caldwell: And finally, Duncan, do you personally invest in the Ruffer Investment Company?

Duncan MacInnes: Yes. My biggest personal investment is my stake in Ruffer’s partnership. And then on top of that, a share of our earnings, our profits every year, get invested into one of the open-ended Ruffer funds. I also have a disclosed stake in Ruffer Investment Company. So, yes.

Kyle Caldwell: Duncan, thanks for your time today.

Duncan MacInnes: Thanks.

Kyle Caldwell: So, that’s it for our latest Insider Interview. I hope you liked it. For more videos in the series, hit that subscribe button and do give us a like. Hopefully, I’ll see you again next time.