Ruffer LLP Investment Director Matt Smith talks with MLC Portfolio Specialist Sinead Rafferty about the risk of inflation, Brexit, and out of favour value stocks and how they might perform under a range of scenarios.
Sinead Rafferty: Hi, I'm Sinead Rafferty, Portfolio Specialist at MLC and today I'm joined by Matt Smith from Ruffer. Ruffer is one of the multi-asset Fund Managers that is in our MLC Inflation Plus portfolios. So thanks for joining us today, Matt.
Matt Smith: No problem. Thanks for having me here.
Sinead Rafferty: Can you tell us a little bit about some of the themes that are prevalent in the Ruffer portfolio at the moment?
Matt Smith: Our sort of core position is in inflation linked bonds. We see those as very important to protect investors against inflation. Now we've not had any inflation, so you know why on earth are you holding these things? We think that although there's no sign of inflation, if it does turn up it's absolutely something that you'll want protection against. It tends to erode the real value of most assets. So having protection against it in the form of inflation linked bonds or gold is well worthwhile. Another theme is broadly in the equity part of the portfolio. We see a real opportunity in value stocks at the moment. We're absolutely not value investors. We've got plenty of stocks that are jaw droppingly expensive, but the majority of our exposure is to value stocks that are very out of favour at the moment.
There's a pretty serious consensus in the market that we're heading into recession. So a lot of companies that are sensitive to the economic cycle like banks, like steel makers, mining companies, they are very unpopular for pro-growth strategies leaving them pretty cheap. Now we think that it's hard to say whether there's going to be a big return to growth in the world economy next year, but if there is these companies should do pretty well and they'll help the portfolio make overall headway because if the economy is doing well, then yields are likely to be rising and that means that the bond part of the portfolio will be struggling to make positive headway.
Sinead Rafferty: So one of the interesting things about your portfolio at the moment is it's quite defensively positioned with an allocation of only about 40 per cent to shares. Is that reflective of a view on market valuations?
Matt Smith: I would say yes. We see attractive return opportunities in plenty of pockets of the market. Overall valuations in a lot of markets worldwide are quite extended now that's fine, but after a 10 year bull market, people will start to do pretty risky things. It's a bit like before the credit crisis, everyone kind of assumed that US house prices would rise forever and built portfolios around that assumption. That turned out not to be the case. What's the craze at the moment? It's yield. You know people assume that interest rates will never rise. So they buy evermore risky bonds, maybe corporate bonds to try and generate a yield or they buy yield enhancement strategies. Now if interest rates do start to rise and at the moment there's no reason to see why they should, a lot of those will be under threat. So we seek to protect the portfolio against an unwind of those kind of market strategies that are out there.
Sinead Rafferty: So it would be remiss of me talking to a UK fund manager not to talk about Brexit. How do you manage the risks of that in terms of both individual asset classes, but more importantly probably in terms of managing the risk of sterling and volatility?
Matt Smith: We, I would say manage the risk of no deal Brexit or a sort of a hard disorderly Brexit through the UK bonds that we hold in the portfolio, which as you saw after the referendum in 2016 performed very strongly and we have about 2 per cent of the portfolio's currency exposure outside of sterling. So in the event of Brexit going badly, well it's quite hard to think of it going well. You would see the pound decline. Those bonds would go up and we think the portfolio will be well protected against that. That's kind of what everyone expects though. What we wonder is whether with a successful conservative election, Boris Johnson, who's been to the European Union, got a new deal and got it through the House of Commons, could actually start the UK off on a better path.
The pure absence of fear of Brexit and after an election fear of Corbyn, would potentially mean that quite a lot of capital could return to the UK, to the property markets, but also to those domestically focused UK businesses that have been under the cosh for three years really. We worry about a hard Brexit and we've got bonds to protect against that, but we also think that the return opportunities if it's a softer or more managed Brexit could actually be pretty attractive in the equity space.
Sinead Rafferty: Thanks for your time, Matt.
Matt Smith: Thanks for having me.
Sinead Rafferty: Thank you for joining us.
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