Portfolio management with risk at its core

Funds Management

by Clive Tompkins

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Ruffer LLP Investment Director Alex Lennard talks with MLC Portfolio Specialist Sinead Rafferty about the firm's approach to risk management and what this means for its portfolios and returns if markets fall. 

Sinead Rafferty: Hi, I'm Sinead Rafferty, Portfolio Specialist at MLC. And today I'm joined by Alex Lennard from Ruffer, a UK Portfolio Manager that's in our MLC Inflation Plus Portfolios. Welcome, Alex.

Alex Lennard: Thank you for having me.

Sinead Rafferty: Can you give us a little bit of colour for those not familiar with Ruffer on your background of the firm and also the investment philosophy?

Alex Lennard: Ruffer was founded 25 years ago by Jonathan Ruffer, largely because he felt that the investment industry as a whole wasn't looking after clients terribly well. So through the 1980s and early part of the '90s in the UK, you had the growth of the balanced sector, which largely meant that more and more clients were being funnelled into index funds of various types through the previous decade. And that worked really well when markets were going up. Investors were making money, and the investment managers were able to take credit for the hard work that markets were doing. But Jonathan felt that that alignment of interests broke down when markets fell. It meant that clients would go to meetings with our investment managers and hear the deathly line, "Markets are down 20 per cent. Haven't I done a good job? I've only lost you 15."And Jonathan with his background looking after private clients felt that that was a genuine misalignment of interests, so set Ruffer up with the aim of doing something genuinely different for clients, so set up the organisation to first and foremost preserve client capital. Very much at the centre of his thought process was as much as cons, like making money, they hate losing it more, and that's been the philosophy that we've followed for the last 25 years. And having had a genesis in the private wealth industry, increasingly as we've had more and more heart-sinking drawdowns and equity markets in particular, that approach has become more appropriate for institutional clients who want to reduce the volatility of their portfolios and genuinely have an investment manager or an allocation providing an uncorrelated return stream in portfolios.

Sinead Rafferty: So given the fact that you've got quite concentrated positions in various different asset classes, can you talk to us about how you manage risk?

Alex Lennard: When we think about risk, we always come in at the starting point of although we have strong views about the world, we're always asking ourselves, "Well, what if we're wrong?" So if you think our starting point is putting together a portfolio that preserves capital, our first point-of-call will always be to look at the risks that we see in the world, and once we identify those risks, try and identify the assets that we think will make money, should those risks come to pass. And once we have those in place, we spend the rest of our energies asking ourselves, "What if we're wrong?" If the risks do not happen, do we have enough growth on the other side of the portfolio to make money whilst we're waiting for those risks to come to pass?

Now, if we had perfect foresight, we would switch from our growth investments to our risky, to our protected investments at the top of the market and vice versa at the bottom. Unfortunately, we don't have perfect foresight, so we're always going to have some growth and some protection in portfolios at all times that will hopefully allow us to be approximately right all of the time and in contrast to the rest of the industry, which is proffering to try and be absolutely right all of the time. Our starting point is to try and avoid being absolutely wrong at all points.

Sinead Rafferty: So finally, Alex, is it really a bottom up process in terms of how you build a portfolio or more of a macro top down process?

Alex Lennard: Definitely informed by a top down process. We think the majority of our returns and the ability to protect clients is driven by our asset allocation thought processes and our big picture views of the world, but we will always populate the portfolio with ideas that have been through a thorough bottom up process. And I think the strength of what we do is combining that top down with bottom up. A lot of investment houses will separate the two, and that means you don't often get a joined up portfolio. But the strength of our process is the fact that we will combine those deep macro views with also deep thoughts on the bottom up side of things and the combination of the two we think creates a holistic portfolio focused on preserving client capital.

Sinead Rafferty: Thanks for your time, Alex.

Alex Lennard: Thank you for having me.

Sinead Rafferty: And thank you for joining us.