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Ruffer reflects on good year and addition of bitcoin to the portfolio

The flexible investment sector company, Ruffer (RICA), which invests using what it describes as an ‘all-weather’ approach, reported annual results to 31 December 2020. The share price return of 17.0% and the NAV return of 13.5% for the calendar year 2020 marks two consecutive years of good returns for shareholders (+23% in NAV performance over 2019 and 2020). For the six months to 31 December 2020, the NAV return was 6.4%.

Attribution – Ocado led equity investments with 79% 2020 return

The following analysis and outlook comes from RICA’s management report.

“Attribution for the year 2020 tells only part of the story. What was important was not just what you owned, but when you owned it.

In order to hold onto the major positive contributions from gold, credit protection, US Treasury Inflation Protected Securities (TIPS) and option protection, we needed to add opportunistically and lock in gains at various points during the year. Similarly, while we lost money in equities over the year as a whole (too much cyclical exposure in Q1), timely additions in the middle of the year and a further rotation into cyclical stocks meant that this part of the portfolio performed strongly in the bounce in markets and vaccine announcement in November.

Within the equity book the standout stock has continued to be Ocado, rising 79% in 2020, 13% since 30 June and 774% since purchase. Three other notable successes were Fujitsu (+45% in 2020, +82% since purchase), Sony (+39% in 2020 and +271% since purchase) and Weiss Korea (+57% in 2020 and +138% since purchase).

Having been a drag in the first half of 2020 our positions in cyclical and value stocks were justified in the second half of the year as they acted as an offset to long-duration assets and covid winners (gold and long-dated index-linked bonds for us, technology and growth stock for many others). Stocks exposed to a ‘v for vaccine’ recovery have done well since purchase – notable contributions came from Cemex (+98%), Uber (+44%), Barratt Development (+42%) and Vinci (+42%). At the very end of the period under review, the announcement of a post-Brexit trade deal benefited our position in domestic UK equities and the decision to add to this part of the portfolio in October. The reaction was more muted than we expected, but as the covid clouds start to clear we expect the discount on UK equities to narrow.

Although our cyclical/value stocks were strong immediately following the vaccine news, we must remember both the portfolio role they play and the longer-term context. These stocks are geared to improving economic prospects and rising interest rates – this is vital as the rest of the portfolio stands to benefit more from continued financial repression and poorer market and economic outcomes. Secondly, these types of stocks have underperformed growth and quality factors for a decade. If there is an extended rotation, which would rely upon improved economic growth, then the recent outperformance has much further to run.”

‘Bitcoin investment reflects RICA’s history of using unconventional protections’

“One notable addition to the portfolio during November was bitcoin exposure. We gained our bitcoin exposure via the Ruffer Multi Strategies Fund and two proxy equities in Microstrategy and Galaxy Digital. At the period end, the combined exposure of these was just over 3%. In the short period since investing both stocks are up more than 100% and bitcoin is up 90%.

Our rationale has been well publicised but briefly, we have a history of using unconventional protections in our portfolio. This is another example, a small allocation to an idiosyncratic asset class which we think brings something significantly different to the portfolio. Due to zero interest rates the investment world is desperate for new safe-havens and uncorrelated assets. We think we are relatively early to this, at the foothills of a long trend of institutional adoption and financialisation of bitcoin. Think of bitcoin’s bad reputation as a risk premium – as we move through the process of normalisation, regulation, and institutionalisation, the compression of this premium can have a dramatic effect on the price. If we are wrong, bitcoin will return to the shadows and we will lose money – this explains why we have kept the position size small but meaningful.”

RICA: Ruffer reflects on good year and addition of bitcoin to the portfolio

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