The Ruffer investment trust has been a defensive stalwart for investors through tricky times this year, but it is dipping its toe back into markets and moving some of its cash, according to investment manager Jasmine Yeo.
Last month, she and co-manager Duncan MacInnes explained that the trust was at its lowest equity weighting in 20 years, a decision that helped the portfolio make a 2.9% gain in the first six months of 2022 – a rare positive performance among investment trusts.
However, Yeo said that the team has been “lured out of cash in recent weeks” by an asset class that is now as cheap as it was in 2016 – US treasury inflation protected securities (TIPS).
“Buying equities isn’t the only way to dial up risk in portfolios today. We see the recent falls at the long end of the US bond market as an opportunity worth grabbing,” she said.
Being long duration has been an unpleasant place to be over the past decade. With interest rates low (and generally on a downward trajectory), bonds with decades to maturity have paid next-to-nothing and have been more volatile than their short-duration counterparts.
However, with rates now on the rise, these longer duration assets now offer compelling yields, while US TIPS will also rise in line with steep current inflation rates.
Yeo said: “With real yields now positive, US TIPS look like an attractive risk to take on. In a world full of uncertainty, if you were offered a return above inflation of almost 2% for the next 30 years, with no default or deflation risk, and in a sovereign, dollar denominated asset, wouldn’t you be tempted? We are.
“Adding TIPS also provides the chance to diversify our inflation protection – and to make money should tightening pressures ease. In fact, it’s hard to imagine a scenario in which equities can rally without a move in yields first.”
Bond markets are typically the first ones to move in response to any change in macroeconomics and Yeo argued that this could be about to happen, with inflation close to peaking, which in turn should lead to the pausing of interest rates by central banks.
“Our view remains that we are firmly in a new structural regime of inflation volatility, and the recent actions of governments and central banks have only reinforced this view,” she said.
“However, shorter term, we can foresee inflation falling (just not all the way to current central bank targets) and recession risks continuing to rise. As a result, we have positioned the portfolio to navigate an environment where rate hikes will slow or even pause in the next few months. Bonds will help us do that.”
However, she also noted that these bonds are a two-way bet for investors, who will make money if the Federal Reserve slows down or pauses its rate rises but could also do well in a recession (caused by continued rate rises), as bond yields in this scenario tend to fall.
Yeo noted that this was also the case during the Covid nadir, when the trust also invested in TIPS before they rallied in the summer of 2021.
“Market sell-offs can provide the chance to buy quality assets at attractive valuations. Of course, if you can preserve capital as prices fall, then you’ll be better placed to take advantage of any opportunities that arise,” she said.