According to the investment trust’s chair, Ashe Windham, while it is impossible to call exactly when such a jump in inflation could occur, “there is no doubt that we have moved closer to this denouement in the last 12 months”.
Writing in the company’s annual report, Windham said this view explained why, at the year-end, 46% of the value of the company’s portfolio was invested in inflation-linked securities.
A figure, he said, which along with a modest 2% cash, a 7% weighting in gold and gold mining equities and a 7% weighting in illiquid strategies, represent the “defensive” element of the fund’s carefully constructed portfolio.
Expanding on this further in the investment management report, Ruffer AIFM explained that, while investors have become accustomed to markets forcing change onto complacent politicians, this appears to be changing. Increasingly, the team said, “elections, as opposed to market events, are now the clear and present danger to politicians”.
“Paradoxically,” it added, “this brings us closer to the inflationary denouement that we anticipate. The reaction function of central banks and governments to keep the show on the road remains intact with one subtle difference; central banks have openly stated that monetary policy is running out of road and requires the support of government induced fiscal stimulus.”
According to Ruffer, such moves are already afoot, with developments such as talk over a possible corporation tax cut in the US and the increasing debate around helicopter money.
“In the short term this may help steady the ship,” the team said, “but it sets a hare running that will be difficult to control. Markets recovered into the end of June after a nasty shock, but persistently low growth, deflationary pressures, rising inequality and an inability to deleverage is a Molotov cocktail of risks to be guarded against.”
Changing dividend policy
For the year, the trust reported earnings of 1.93p per share on the revenue account and a loss of 4.65p per share on the capital account. It also paid dividends of 3.4p per share over the course of the year.
Windham pointed out that the trust’s investment portfolio generated less income than was distributed, which has meant that it has had to call on its reserves to meet its dividend payments.
The firm has taken the decision to change the way in which it pays dividends to the way in which it was done at the inception of the company, such that distributions fall into line with the net yield on the investments.
According to Windham, the board took the decision that it is not shareholders’ best interests to start making distributions from capital reserves as it would force the investment manager to put capital at excessive risk in the pursuit of income.
“This approach would compromise our strategy and leave this Company out of kilter with our claim that it represents ‘a slice of Ruffer’ in its adoption of a total return investment approach,” Windham explained, adding that, as a result, the dividend is likely to be reduced within the next 12 months.
However, he added: “The board will retain the ability to accumulate income reserves as was previously the case. In a world of zero (and negative) interest rates where income returns have been forced ever lower, the directors feel that this approach gives the Company the best chance of meeting its capital preservation objective and by extension its ability to generate income returns in the future when interest rates normalise.”