Former Ruffer manager: why we’ve underperformed

Shortly after appearing in our Insider Interview video series, it was announced that Duncan MacInnes, co-manager of Ruffer Investment Company, had left the firm “with immediate effect”. Our interview with MacInnes took place on 6 February, just a few days before the announcement on 12 February.

In the video, MacInnes addresses why the past three years have been a tough period for Ruffer Investment Company (LSE:RICA), which resulted in a loss in share price total terms of -8.2% (as of 12 February 2025). MacInnes also explained why the wealth preservation trust has been increasing exposure to shares, including China, and details the types of defensive assets the trust owns, including the types of bonds favoured.

MacInnes had co-managed the investment trust since September 2016, having joined Ruffer in 2012. 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 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, Ruffer Investment Company is one of a small number of wealth preservation strategies. Could you explain your investment approach and which types of investments you back?

Duncan MacInnes: Yes, so Ruffer's been going for 30 years and we've always done one thing. The one thing is a global multi-asset absolute return go-anywhere strategy, totally un-benchmarked. And that means we start with a blank sheet of paper. What we try to do is find a mix of protection and growth assets in the portfolio. So, hopefully when you put them together, they provide some capital growth, but also that preservation of wealth that you talked about.

The growth assets are usually equities, sometimes commodities, but usually listed equities. The protection assets can change quite dramatically, really, based on the economic environment or the market environment. So, it's often bonds, currencies, precious metals like gold, but also sometimes it's derivatives. A small part of the portfolio that can punch very hard in certain circumstances to protect against specific risks that we see.

Kyle Caldwell: In a rising market, your shareholders wouldn't necessarily expect you to keep pace with, say, how the global stock market performs. However, the past three years has been a difficult period of performance. Over that period, you've made a loss in share price total return terms. Why has that happened and why should investors continue to back your strategy?

Duncan MacInnes: I would disaggregate a little bit ,and you say in share price terms, so, from its peak in 2022, the share price has moved from a premium of 4% to NAV to a discount today of 4%. So, that swing in the premium to discount has cost about 8%, which is painful, especially in a wealth preservation vehicle.

Now, the board of Ruffer Investment Company have been quite proactive in terms of trying to address that discount. We've got an industry-leading discount management policy. They've bought back 14% of the shares outstanding in 2024. That run rate is continuing into 2025. There's lots of discussions with shareholders about what more can be done about that. So, that's the premium discount swing.

Then the NAV performance on top of that, as you say, has not been particularly good. That's because effectively we didn't have enough risk in the portfolio in 2023. We [thought] the market pain of 2022 would translate into a recession in 2023, and we weren't alone in thinking that, but everyone was wrong. Actually, the economy surprised positively. It was good and markets were good. So, I think the biggest issue was 2023. 2024 was not great. It was flat in NAV terms. And then 2025 so far, year-to-date, we're up about two and a bit per cent.

But I think when it comes to asking people to persist with us, I would say that we have been doing this a long time. We've done it through multiple cycles, multiple different market environments, and I would ask people to judge us over the full track record of Ruffer Investment Company. So, it's 30 years annualised at about 8% per annum after fees. Rather than judging us just on the one half cycle that we've seen from the end of 2022 through to today. You know, it's very uncomfortable. We feel it too. But when the market weather changes, we think we're positioned to do very well and we would ask for a little bit more patience.

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Kyle Caldwell: You mentioned the low amount of exposure to equities has held back returns, but I think this is something you're seeking to address at the moment as you have been increasing exposure to equities?

Duncan MacInnes: Yes. So, the equity exposure got as low as about 12% to 13% in 2023, around the time of Silicon Valley Bank, where we were very worried about the financial system, asset prices and the recession. Fast forward to today, and the equity weighting is more like 30%, which is much more normal, in keeping with a low-risk multi-asset portfolio. And so we've been adding that risk as that recession risk dissipates. But we've also been adding to two bonds as well. So, the overall portfolio is much more balanced, I think, than it was for those brief few months in 2023 where we were max defensive.

Kyle Caldwell: And within that equity allocation you've been increasing exposure to China. Could you explain why?

Duncan MacInnes: So, China is a controversial one. In the annual report, I referred to the portfolio as 'a portfolio of ugly ducklings', assets that nobody wanted to own. And I think maybe China is one of the ugliest ducklings. Now, why do own China? Let's start with the valuations. China is one of the cheapest equity markets in the world. You're looking at 10 times earnings for the index. Even global technology leaders like Alibaba Group Holding Ltd ADR (NYSE:BABA) own 12 times, sentiment to Chinese equities and the allocations that people have to Chinese equities are very, very low.

The word that we most commonly encounter when we say that we have exposure to China is that it's uninvestable. And I get it. I get why people would say that they think it's uninvestable, but I think uninvestable should be music to your ears. It's a very closed-minded approach. It suggests that there is no price at which they would be willing to take that risk. And I think that's not the right way of looking at it.

So, maybe the next way of looking at it is China's 25% roughly of global GDP. We all have exposure to the Chinese economy, whether we like it or not. If you own global growth companies like Caterpillar Inc (NYSE:CAT) or Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC) or Starbucks Corp (NASDAQ:SBUX) or Tesla Inc (NASDAQ:TSLA) or NVIDIA Corp (NASDAQ:NVDA), you have China exposure. You're just paying a much, much higher price for it than owning the risk directly.

And then maybe the last element, which I think is quite an important example of how we think about all assets, we think about them individually, but we also think about them in the portfolio context. So, in the portfolio context, what are people most worried about with China? They're worried about the continuation of Cold War 2, that Xi [Jinping] invades Taiwan. Some really bad outcomes could happen and Chinese equities could have a huge loss. That is possible. But in that scenario, if we go down that path, that's extremely negative for the global economy and it's extremely negative for global markets. And in that world, I think the rest of our portfolio does very well.

So, we have gold, we have oil, they'll do well. The unconventional protective assets, the downside equity protection, the downside on credit protection, all these assets should do very well in that world. So, in that really bad scenario for China, I think the whole portfolio is well set.

On the other hand, what if Trump and Xi do a deal? He's a man that loves to do deals. He's talked about having a productive phone call. It's possible that China gets brought in from the cold, welcomed back into the global economic forum, and Western investors have to re-engage with the market, which would be very positive, we think, and could result in a significant re-rating.

Kyle Caldwell: You mentioned you've been increasing exposure to bonds. Could you explain which types of bonds you back?

Duncan MacInnes: There's a lot to say on bonds. If you step back a little bit, strategically or structurally, we think that bonds are probably in a bear market and you don't want to have them as a part of your strategic asset allocation or certainly not as much of them as you might have in the past.

You've now had four consecutive years of losses on US Treasuries, which has never happened before. Back in 2021, I was writing articles about the death of the 60/40. And no, Mr Bond, I expect you to die. The situation has changed quite a bit after those negative returns. Why do people own bonds? They own bonds for income. They own them for protection and they own them for diversification. If you go through that checklist today, then the income has got much better. Rates have gone from zero to 4% to 5%. The protection is back on the table. If something bad happens in markets, if you have a recession, then there's room for the Federal Reserve to cut interest rates and the bonds should do quite well.

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But where I think bonds still struggle, maybe even fail, is on that diversification element. So, there's lots of academic research out there that suggests that when inflation is above 3%, stocks and bonds are positively correlated; they move in the same direction. This is exactly what we saw in 2022, which was a disaster for diversification. So, it's not clear that bonds are going to be that useful.

However, tactically, we think that bonds could be interesting, especially from a few weeks ago when we were buying, the bond yields backed up real yields, so inflation-linked bonds got up to 2.3% in the US, and we were buying there because what you're getting when you buy a 10-year inflation-linked bond is a promise from the US government to pay you 2.3% plus inflation, whatever inflation turns out to be for the next decade.

And I think that becomes quite an attractive investment because first you can just hold it to maturity and you know you're going to get that minimum base level return, or inflation can spike, or bond yields can come down. Those bonds can rally in price, which is what they've been doing in the last week or so. Then you can maybe sell them for significant short-term profit and reinvest into something else. So, we look at all sorts of bonds, nominal bonds, inflation-linked bonds, US, UK, all around the world, but the recent purchases have been US TIPS [Treasury Inflation-Protected Securities].

Kyle Caldwell: And how does your bond exposure reflect your latest views on interest rates and where inflation is heading?

Duncan MacInnes: The market has moved a long way on pricing interest rates. About six months ago, the forecast of the bond market was, I think, eight cuts in 2025 from the Fed, probably around that for the Bank of England. And then we moved to a point a few weeks ago where there were almost no cuts, maybe one or two cuts priced in for the year, and that was when we were buying.

We're back to sort of similar, two or three cuts priced in and I wouldn't quibble with that too much. That feels about right, barring unforeseen events. What I think is really interesting is what's going to happen with inflation. So, we have now had four years, 48 months, of above-target inflation in the US. And yet despite that, Federal Reserve chair Jerome Powell has come out and declared victory on the fight against inflation and, of course, they've started cutting rates in the US and in the UK and in Europe.

So, if you've had four years of above-target inflation and you've already started cutting rates when it's above target, it would maybe suggest that the target isn't the target or isn't at least the whole picture of what they are looking at.

If you zoom out a bit and look at the big picture of inflationary episodes like in the 1940s or the 1970s, what you see is this pattern, that inflation comes in waves. So, we've had the first wave of inflation. We've then had the disinflation, which we talked about the last time I was on. The question is, is there going to be a second wave? And we think there might be.

If you were to concoct a recipe for what would cause the second wave, I think it would look quite a bit like today's current set-up. You've got an economy that's surprising everyone and being strong, you've got to full employment, strong wage growth, central banks who've declared victory on inflation, perhaps prematurely. Interest rate cuts happening. Governments that want to stimulate. Still geopolitical risks, although we have to admit they're probably receding a little bit, and then also lower commodity prices. So, it's a lot easier for inflation to accelerate from here when oil is in the 70s than when it's in the 90s or 100.

So, I just think that it's way too soon to declare victory on inflation. But when you look at market pricing and at what central bankers are saying, to some degree they're saying it's yesterday's problem.

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Kyle Caldwell: And your view that there could be a second wave of inflation, that's the reason you think the 60/40 portfolio may not work as well in the future as it has done in the past?

Duncan MacInnes: That is one of our main views. Our big-picture view is that the 60/40 is not going to be sufficiently diversified because of those correlation characteristics that we talked about.

And so people, investors, ourselves and people who might invest in us are going to have to be far more thoughtful in terms of their portfolio construction and a bit more nimble, because the truth is that the asset class correlations, the way that the different assets move in relation to each other, is going to change quite significantly based on what point of the cycle you're going to be in, which is very different to the 20 years pre-Covid where we basically existed in one fairly benign, low-growth, low-inflation economy.

Kyle Caldwell: Duncan, thanks for your time today.

Duncan MacInnes: Thanks.

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