Risk assessment essential for long-term returns

Funds Management

by Clive Tompkins

Ruffer LLP Investment Directors Trevor Bradley and Alex Lennard discuss the firm's DNA and how it works to deliver positive returns regardless of how the financial markets perform.

Jason Hazell: Hi. I'm joined today by Trevor Bradley and Alex Lennard from the London-based investment firm Ruffer. Welcome, gentlemen.

Alex Lennard: Thank you.

Jason Hazell: Trevor, I wouldn't mind starting with you. Would you mind giving us a quick overview of Ruffer as an investment house?

Trevor Bradley: Certainly, Ruffer was started by Jonathan Ruffer in 1994 and he remains our Chairman today. He started the business because he felt that individuals were poorly looked after by the fund's management industry. Fund managers would basically take their money and simply invest it in the market with all the risk that, that entailed. He believed that individuals needed to have their money protected as well as see it grow and so we built an investment strategy, which is aimed at doing that.

The firm now has over 250 people. We have an office in London and research office in Hong Kong as well and we look after a little bit short of 40 billion Aussie dollars for a range of individuals, endowments, and institutions such as MLC.

Jason Hazell: Okay, thank you and Alex what is it that Ruffer is trying to achieve on behalf of investors?

Alex Lennard: So as Trevor mentioned, Ruffer was initially founded as a private wealth business to look after individuals in the UK and that really informs our DNA and the way we think about the world is as much as clients like making money, they hate losing it more. What we're trying to do is put together portfolios of assets in such a way that first and foremost we're thinking about preserving our clients' capital. That might seem rather dull but actually if you don't lose 2 per cent in any one year, you don't need to make 33 per cent the following year just to get back to where you started. So we find if you're able to put together a portfolio in such a way and make consistent steady returns over the long term, it will come out with quite good outcomes for clients.

Jason Hazell: Trevor we're interested in the current risk environment and how Ruffer is viewing particularly market valuations at present.

Trevor Bradley: One of the ways we aim to protect investor's capital is by spotting where there are excesses in the markets. Particularly those excesses come out as a mania and then get on the other side of that mania so that when things go down we have assets, which rise in value. Over the years, we've managed to navigate through the dot com bust, the GFC and what we fear now is that we're coming out of an environment where yields have been very, very low and will rise. That poses a threat to both bond valuations and equity valuations such that they could move down in a correlated fashion. That's essentially the challenge on risk at the moment.

Jason Hazell: So you're much more on the fear side than the greed side. Is that fair to say?

Trevor Bradley: Yeah, we think of individuals as being born with elements of both fear and greed. I think that it's fair to say the investor's that are attracted to Ruffer are more fearful of losing their money as Alex has indicated than they show greed in respect of returns. But, obviously we want to both protect their capital and see it grow over the long term as well.

Jason Hazell: Well Alex if you can just pick up on that, how's the portfolio currently positioned given what Trevor's just said about the market environment?

Alex Lennard: What we're trying to do is never aim to be entirely right. We're always trying to consider all outcomes that are possible to us. As Trevor said, we are of the view that we are coming towards the end of a mania at a moment so broadly speaking we are more fearfully oriented than we are greedily oriented. That to our mind is very much informed by the fact that the problems of the GFC are still unresolved. There's too much debt in the world and not enough growth to see it paid back. Ultimately, we think that the way that this debt gets paid up back is it gets defaulted on via means of inflation whereby inflation runs ahead of the prevailing rate of interest for a prolonged period of time. This is unlikely to be good for most asset classes and the way we protect against that in the long term is through a portfolio of inflation linked government bonds in the UK, the USA and Canada.

In the meantime, we try and capture growth opportunities through equities particularly those that are geared into economic recovery so things like financials and bank stocks and commodity stocks that if the world does prove strong enough to withstand higher interest rates and have a benign deleveraging of sorts, we're able to capture those growth opportunities and we pair both of those investments in the very short term with slightly more esoteric investments. As Trevor hinted at we're worried that you might have a correlated fall in most asset classes, so looking at things that could potentially be anti-assets would play an important protective role in the portfolio so credit default swaps and options that benefit from rising volatility in both equities and bond markets are a way that we add that anti-asset.

Jason Hazell: Trevor, just one last question. How late do you think we are in this cycle and what are the key indicators that you're looking at, at the moment to give you that indication that we're getting late towards the cycle?

Trevor Bradley: It's a difficult question, how late? We're definitly late in the cycle. If you look at what happened beginning of last month, in February, that could have been the end and obviously we don't want to be too late, which is why we're always guarding against these things. What we've seen is that market's recovered but the rise in volatility that we saw earlier in February and the sharp fall in equity markets before that recovery was suggestive of us that we are quite near that late point in the cycle.

In a way, what we've seen in the last month is a little bit like how Bear Stearns went bust ahead of Lehmans. Is it a sign on the pathway to a sharper fall in equity markets? We fear it could be, which is why we have the protection, which Alex outlined, but if it takes some while we want to be generating positive returns, which is why we still have around 40 per cent in equities in very sensitive stocks to growth, as Alex illustrated.

Jason Hazell: Well many thanks for your time today.

Alex Lennard: Thank you for having us.

Trevor Bradley: It's a pleasure.

Jason Hazell: And, thank you for joining us.