Ruffer the illusion of diversification away from equities

[richfool]

I was a bit puzzled at Ruffer's grouping/inclusion of renewables and infrastructure in with growth and tech in terms of all being vulnerable to equity risk.

Ruffer: The illusion of diversification when rates are rising and the Fed is hawkish
8 April 2022

Ruffer fund manager Duncan MacInnes challenges the wisdom of adding different types of equity risk to portfolios when the US Federal Reserve is clamping down on inflation and interest rates are rising from historic lows.

The shape and probability of this boom might be changing in the face of war, but for this scenario we have exposure to energy, commodities and financials. These are (still) some of the cheapest sectors of the market implying investors ascribe this right tail outcome a low probability.

Where we think you don’t want to be is in the middle of the distribution – for a resumption of the old regime of low and stable growth and inflation.

The winners of that regime were tech, quality growth stocks and long duration assets like venture capital, renewables and infrastructure which look extremely vulnerable to the rising interest rates and risk premium environment.

Yet this seems to be where most investors are exposed.

https://www.theaic.co.uk/aic/news/cityw ... the-fed-is

[richfool]

I thought I was getting reasonable diversification away from equity risk and equity risk arising from rising interest rates, by also holding: multi-asset trusts, REIT's, commodities, renewables and infrastructure. Ruffer seems to be lumping renewables and infrastructure in with general equities.

[XFool]

...OK. Given Ruffer are kind of 'perma-bears' - or 'perma-risk averse' if you prefer, but do these comments not make sense?

"Where once there was a large allocation to listed equities, there is now an increased weighting to private equity and venture equity. But all equity – private, public and venture – is subject to the same underlying economic forces and vicissitudes."

"Take a 40-year infrastructure asset currently valued using a discount rate of 6%. Bearing in mind interest rates in the UK are currently at 0.75% and if we assume they rise to 2% by the end of the year, then it would be fair to assume the discount rate for the investment will rise to, say, 7%. In that scenario the net asset value of the investment falls by 16%."

[Walkeia]

A lot of infrastructure, REITs and renewables have inflation linked income streams. In addition discount rates have fallen slowly over the last decade from 8 / 8.5% to 6 to 6.5%; there is no reason to assume they should snap higher following interest rate rises but instead drift up if the higher interest regime persists.

[richfool]

The winners of that regime were tech, quality growth stocks and long duration assets like venture capital, renewables and infrastructure which look extremely vulnerable to the rising interest rates and risk premium environment.

The point I was picking up on, was that Ruffer seemed to be suggesting that renewables and infrastructure look extremely vulnerable to a fall in equity prices, due to the Fed and central banks raising interest rates. Whereas I tend to have looked upon renewables, infrastructure and REIT's as alternative asset classes that give some protection and defence against a fall equities. Indeed John Baron, Capital Gearing trust and David Stevenson hold renewables, infrastructure and REIT's for that (defensive) purpose, and I recollect reading articles from them, over the last 9 months or so, discussing them taking increased positions in those asset classes for that very purpose. I ponder whether this is just a case of Ruffer trying to knock the opposition.

[Dod101]

The winners of that regime were tech, quality growth stocks and long duration assets like venture capital, renewables and infrastructure which look extremely vulnerable to the rising interest rates and risk premium environment.

The point I was picking up on, was that Ruffer seemed to be suggesting that renewables and infrastructure look extremely vulnerable to a fall in equity prices, due to the Fed and central banks raising interest rates. Whereas I tend to have looked upon renewables, infrastructure and REIT's as alternative asset classes that give some protection and defence against a fall equities. Indeed John Baron, Capital Gearing trust and David Stevenson hold renewables, infrastructure and REIT's for that (defensive) purpose, and I recollect reading articles from them, over the last 9 months or so, discussing them taking increased positions in those asset classes for that very purpose. I ponder whether this is just a case of Ruffer trying to knock the opposition.

I suspect that you worry too much. This high inflation (when it comes) and higher interest rates are, I think, just steps towards 'normality'. We have had almost no inflation for a very long time and very low interest rates for the last 15 years or so. What they will do to share prices in general and to renewables and infrastructure funds in particular, well your guess is as good as mine. If the market drops well so be it. It will recover. I certainly would not place too much credence on any fund manager, and as has been said, Ruffer, like Personal Assets, are perma-bears. Like the stopped clock they will be correct occasionally.......

I would suggest that you forget this 'problem' and go and enjoy life.

Dod

[XFool]

Another side to things for anyone interested in Ruffer:

Is it worth pointing out again (it may even be slightly against my interest!) how I eventually settled on Ruffer (RICA) as a solution(?) to the problem of what to do with spare cash in a share account before or between investment in equities etc. The problem to be solved is that invariably the interest on cash in ISAs is zero.

The only snag from my POV is, after arriving at this conclusion, I delayed too much in acting on it.

[richfool]

I have the view that markets have under-estimated the extent that the Fed in particular will raise interest rates this year. Therefore, I anticipate that there will be something of a shock reaction when the first few rate increases are announced, which will result in a shock fall in equities. I have already taken steps to reduce my exposure to technology and growth stocks, and to increase holdings of more defensive stocks and value stocks. Up to now, I have been happy with my spread of holdings, but thought it prudent review if there are any other holdings that I ought to pare down or tinker with.

My defensive holdings include: PNL, RICA and MATE. Alternative asset classes: (GSF and GRID (battery storage). Renewables (JLEN, BSIF, NESF and SEIT). Utilities and infrastructure - EGL. Commodities, miners and energy: BERI and CYN. Noted the last pair are cyclical.

I also hold half a dozen REIT's for various reasons: BREI, EPIC, PHP, SLI, SUPR and WHR.

Then I hold the usual selection of UK, North American, European and Asian Pacific growth and income trusts, including:-

UK: ASEI, DIG, LWDB, MRCH. (holdings include energy and miners)
Global G&I: JGGI, HINT (Value), SAIN
Global Grth: BUT, MWY and SCIN (the latter gives gold miner exposure, due to be assimilated into JGGI).
Europe: JEGI and EAT
North America: BRSA and MCT (the latter inc energy and REIT's)
Asia Pacific: AAIF, JAGI (now reduced holding), HFEL (income booster) and VOF (an indulgence).

In the event of a major fall, I would see the last group, the equities, as more vulnerable.

[jonesa1]

A lot of infrastructure, REITs and renewables have inflation linked income streams.

Potentially, that's worse than not having inflation linkages, if the inflation linking is capped and inflation rises above the cap. Those businesses with pricing power (e.g. REITs with warehouses at the moment) and market-determined price reviews, will be able to increase their prices to reflect their increased costs. Businesses with contracts specifying a capped index-linked price review, need to hope inflation stays below the cap.

[richfool]

‘Nowhere to hide’: Ruffer drops equity weighting to lowest in 20 years.

05 October 2022

I see Ruffer has reduced equities and switched gold equities to gold bullion. I ponder, is that the way to go in the current situation?

With equities, I do think one must be mindful of the fact that when the BOE gets round to the next interest rate rise or two, online bank savings rates are going to start exceeding the rate available on equities, unless equities fall in price significantly! Though noted gold bullion pays no dividends.

Ruffer said:

Ruffer Investment Company has taken its equity weighting to the lowest level in almost 20 years, with just a quarter of the portfolio invested in stocks.

In its final results for the year to June 2022, managers Duncan MacInnes and Jasmine Yeo said the “particularly dangerous period” we are currently living in has caused them to reduce risk in the portfolio, including dropping its stock allocations to just 25%, the lowest since 2003.

They have also increased the portfolio’s duration to offset the rise in bond yields and have switched from gold equities to bullion, despite noting that the asset had been a “failure of conventional safe havens in recent times”.

“Despite inflation and war being front page news, gold has misfired. We still think it has a valuable role to play, but this greater correlation with risk assets is a consequence of gold’s increased financialisation,” they said.

The changes were announced in Ruffer Investment Company’s full-year financial results, in which the trust reported a share price total return of 5.6% for the 12 months to June 2022, while the net asset value was up 6%.

https://www.trustnet.com/news/13333124/ ... n-20-years

[simoan]

‘Nowhere to hide’: Ruffer drops equity weighting to lowest in 20 years.

05 October 2022

I see Ruffer has reduced equities and switched gold equities to gold bullion. I ponder, is that the way to go in the current situation?

With equities, I do think one must be mindful of the fact that when the BOE gets round to the next interest rate rise or two, online bank savings rates are going to start exceeding the rate available on equities, unless equities fall in price significantly! Though noted gold bullion pays no dividends.

Yesterday I saw a couple of providers had 1-year fixed savings accounts paying 4.56%. So, if my source is correct, that's already higher than the yield on the FTSE100.

[1nvest]

If the market drops well so be it. It will recover. I certainly would not place too much credence on any fund manager, and as has been said, Ruffer, like Personal Assets, are perma-bears. Like the stopped clock they will be correct occasionally

Defensive funds such as Wellesley (US, 35/65 type value stock/bonds)
PV (US data) can broadly do OK. Sees all-stock pull ahead ... only to fall back down to align with it at times. Ruffer and Personal Assets are similar to Wellesley (VWINX)



Sometimes its less a case of market declines subsequently recovering, and more a case of a correction of a over-extension. Japan 1990 for instance over-extension, taking many decades to 'recover' those former highs. With high PE's, low interest rates ...etc. it feels more like a present era correction of a over-extension case/situation.

[Alaric]

Yesterday I saw a couple of providers had 1-year fixed savings accounts paying 4.56%. So, if my source is correct, that's already higher than the yield on the FTSE100.

Not never previously seen though. It just means that the investor in equities is relying on capital growth to make up the yield shortfall, It's the premise that Companies will be able to raise their earnings and hence dividends and share price in line with inflation.

[Dod101]

Yesterday I saw a couple of providers had 1-year fixed savings accounts paying 4.56%. So, if my source is correct, that's already higher than the yield on the FTSE100.

Not never previously seen though. It just means that the investor in equities is relying on capital growth to make up the yield shortfall, It's the premise that Companies will be able to raise their earnings and hence dividends and share price in line with inflation.

Just checked in today’s FT. The yield on the FTSE100 is only 3.93% which surprised me, especially after the recent falls in capital values.

Dod

[1nvest]

Yesterday I saw a couple of providers had 1-year fixed savings accounts paying 4.56%. So, if my source is correct, that's already higher than the yield on the FTSE100.

Not never previously seen though. It just means that the investor in equities is relying on capital growth to make up the yield shortfall, It's the premise that Companies will be able to raise their earnings and hence dividends and share price in line with inflation.

April 2024 forecast has the FT100 same/lower than October 2022 in nominal terms, let alone after relatively high inflation.

FTSE 100 Forecast By Month.
Year Mo Min Max Close Total%
2022 Oct 6425 7245 6835 -0.86%
2022 Nov 6402 7220 6811 -1.20%
2022 Dec 6174 6962 6568 -4.73%
2023 Jan 5953 6713 6333 -8.14%
2023 Feb 6156 6942 6549 -5.00%
2023 Mar 5858 6606 6232 -9.60%
2023 Apr 5849 6595 6222 -9.75%
2023 May 5853 6601 6227 -9.68%
2023 Jun 6019 6787 6403 -7.12%
2023 Jul 5854 6602 6228 -9.66%
2023 Aug 5975 6737 6356 -7.80%
2023 Sep 6154 6940 6547 -5.03%
2023 Oct 6053 6825 6439 -6.60%
2023 Nov 6278 7080 6679 -3.12%
2023 Dec 6170 6958 6564 -4.79%
2024 Jan 6274 7074 6674 -3.19%
2024 Feb 6192 6982 6587 -4.45%
2024 Mar 6231 7027 6629 -3.84%
2024 Apr 6330 7138 6734 -2.32%
2024 May 6548 7384 6966 1.04%
2024 Jun 6696 7550 7123 3.32%
2024 Jul 6823 7693 7258 5.28%
2024 Aug 6829 7701 7265 5.38%
2024 Sep 6910 7792 7351 6.63%
2024 Oct 7256 8182 7719 11.97%

https://longforecast.com/ftse-100-forecast-2017-2018-2019

[simoan]

Yesterday I saw a couple of providers had 1-year fixed savings accounts paying 4.56%. So, if my source is correct, that's already higher than the yield on the FTSE100.

Not never previously seen though. It just means that the investor in equities is relying on capital growth to make up the yield shortfall, It's the premise that Companies will be able to raise their earnings and hence dividends and share price in line with inflation.

April 2024 forecast has the FT100 same/lower than October 2022 in nominal terms, let alone after relatively high inflation.

FTSE 100 Forecast By Month.
Year Mo Min Max Close Total%
2022 Oct 6425 7245 6835 -0.86%
2022 Nov 6402 7220 6811 -1.20%
2022 Dec 6174 6962 6568 -4.73%
2023 Jan 5953 6713 6333 -8.14%
2023 Feb 6156 6942 6549 -5.00%
2023 Mar 5858 6606 6232 -9.60%
2023 Apr 5849 6595 6222 -9.75%
2023 May 5853 6601 6227 -9.68%
2023 Jun 6019 6787 6403 -7.12%
2023 Jul 5854 6602 6228 -9.66%
2023 Aug 5975 6737 6356 -7.80%
2023 Sep 6154 6940 6547 -5.03%
2023 Oct 6053 6825 6439 -6.60%
2023 Nov 6278 7080 6679 -3.12%
2023 Dec 6170 6958 6564 -4.79%
2024 Jan 6274 7074 6674 -3.19%
2024 Feb 6192 6982 6587 -4.45%
2024 Mar 6231 7027 6629 -3.84%
2024 Apr 6330 7138 6734 -2.32%
2024 May 6548 7384 6966 1.04%
2024 Jun 6696 7550 7123 3.32%
2024 Jul 6823 7693 7258 5.28%
2024 Aug 6829 7701 7265 5.38%
2024 Sep 6910 7792 7351 6.63%
2024 Oct 7256 8182 7719 11.97%

https://longforecast.com/ftse-100-forecast-2017-2018-2019

I’m not sure what the point of this table is? Anyone forecasting the future like this is an idiot. Anyone doing so to two decimal places is totally beyond redemption. I was only responding to richfool about a new savings product I had seen and have no wider interest in the FTSE100, Ruffer IT, or these types of discussions more generally.

[spasmodicus]

Well, fortunately the wayback machine can provide us with their forecast from January this year, for October 2022, so we may assess its accuracy.

https://web.archive.org/web/20220119074434/https://longforecast.com/ftse-100-forecast-2017-2018-2019

Not too good, I'm afraid. On 19/01/2022 they were predicting FTSE 100 at around 8258 in October 2022. Today it is actually around 6920.

S