Ruffer: index linkers remain the cornerstone of our strategy

Investor confidence may have returned but the investment team at Ruffer are keeping faith in index-linked bonds.

The team, which comprises Jonathan Ruffer (pictured), Steve Russell and Hamish Baillie, admit one of their concerns in recent months has been that a sharp recovery in investor confidence would hurt their index linked bond positions, which account for 32% of their £270 million Citywire Selection Ruffer Investment Company, 9% of which is stored in gilts.

The team said: 'The prices of index linked bonds were driven up by safe haven buyers in 2011 and should this crowd feel that the storm has passed then they are likely to move out of safety and into risk assets. Index linked bonds remain a cornerstone of our strategy; they may have become dangerous to own after a stellar run last year but we feel they are even more dangerous not to own in a world of sharply negative real interest rates.’

To compensate for the rise in risk asset the team chose to increase the beta in the portfolio rather than sell out of index linkers in a bid to ‘capture as much of the upside in equities as we dare’. This proved to be a fruitful strategy as the safe haven which suffered most was the US dollar rather than index linkers, although the fund’s exposure to the dollar proved to be the principal drag on performance.

This view contrasts with the likes of the one held by Old Mutual Asset Managers' Stewart Cowley, who described gilts as effectively worthless in a piece penned for Wealth Manager.   

On the stockpicking side Ruffer has been supported by decent returns from BT, Carphone Warehouse and Ocado, although this was overshadowed by profit warnings from Tesco, Ericsson and KPN. It has also bought a number of new positions to cater for the rise in risk appetite.

‘If the equity rally continues then the key battleground will be in our stock picking and with this in mind we have added to Johnson & Johnson and Resona and initiated positions in JPMorgan and Mizuho. They have all made respectable starts,’ Ruffer said.

Elsewhere Japanese equities and gold, which account for 24% and 6% of the portfolio respectively, have been the standout performers since the turn of the year.

Ruffer is also concerned about the Federal Reserve’s pledge to keep interest rates at rock bottom until 2014, saying it ‘smacks of moral hazard’, given a lot can happen on the inflation front over this period. It says central bank inflation forecasting over anything but the very short term leaves a lot to be desired.

‘There appears to be scope and appetite to provide further stimulus but the more interesting question is whether there will be the desire to whisk away the punch bowl just as the inflation party gets going, Ruffer said.