Minutes:
Steve Russell, Investment Director for Ruffer LLP, gave a presentation on Ruffer, their investment approach and their current thinking, with particular emphasis on alternative investments. He said that Ruffer were focused on absolute return investment only, and held a wide variety of assets, which were chosen with the aim, in the first instance, of protecting the capital under management. He said that making returns was extremely difficult, given the prevailing economic climate.
He said that, while a significant proportion of the funds under management at Ruffer were invested in equities, the fund was also investing heavily in index-linked gilts. This followed its expectation that, in the light of domestic and global debt levels, inflation could remain high in the medium term, with negative real interest rates. This would be accompanied by a period of deleveraging by banks, which would affect the viability of certain types of investment. He noted that the value of equities had risen highly in the period between 1980 and 2000, but had not always done so historically, particularly in periods of high inflation.
With regards to alternative investments, he noted the high correlation between equity returns and returns in some investments perceived as alternative. He also noted the dependency of some alternative assets on bank finance, instancing infrastructure and private equity. He described other alternatives that Ruffer was investing in, including illiquid assets, which could be a good match for pension funds provided they were identified and priced correctly. He said that there were five issues to bear in mind when choosing alternative investments- correlation to other assets, fee levels, the impact of the withdrawal of bank finance on the asset class, the liquidity of the assets acquired, and the risk of inflation, and/or Government intervention; he gave the action taken by the Swiss Government to lower the value of the Swiss Franc as an example of this.
The Chairman asked what Ruffer’s position on commodities was. Mr Russell said that, given the possibility of a demand shock as a result of the break-up of the Euro, Ruffer was cautious about their purchase at the present, but believed that they might be more attractive in the medium term, once that risk had either diminished or come to pass.
Councillor Ginn asked what percentage of a portfolio should be held in alternative investments to protect against equities volatility. Mr Russell said that Ruffer had a 10 % net exposure to alternatives, which could still make money. He would suggest around 20% should be invested in alternatives. He said that he believed that active management was of high importance, as it allowed investors to benefit from decisions made by managers regarding when to sell and when to buy. He added that returns in alternatives were not necessarily giving drastically better returns, when fee levels were taken into account, however.
Councillor Iggulden asked what returns had been in the sector. Mr Russell said that this could be difficult to ascertain, though the illiquid assets purchased by Ruffer had been returning 5-7% in the 18 months since the strategy was adopted, with returns scheduled to improve over time. He said that forestry returns had also been good, but were, to a large degree, synthetic.
Councillor Iggulden asked about the purchase of art, wine, stamps, and guns as an investment. Mr Russell said that they could provide good returns and provided an excellent inflation hedge but realising the asset could be difficult. Given their illiquidity, he felt that they were a better investment for individuals than for institutional funds or managers.
The Chairman asked about property as an investment, given the presumption of more inflation. Mr Russell said that property was in general overvalued, with the risk of commercial rents falling in the light of economic conditions. Where there had been no boom in value, such as Germany and Japan, investment could be worthwhile, given the prevailing low rate of interest.
Councillor Botterill asked what the effect of demographics would be. Mr Russell said that he had seen no direct evidence of impact, and the long-term nature of change meant that investment would need to be made on very broad principles. He said that he did not believe that land and property would offer strong returns in the next decade, though there would be an end to any inflationary period.
Councillor Murphy asked whether the gap between the interest rate paid by banks and the rate at which they lent would not contain some of the inflationary effect of low rates. Mr Russell said that this was true, but that investors could not, given the need for banks to increase their assets rely on this, investors did not have access to the cheaper rates to borrow or the more expensive rates on their deposits.
RESOLVED THAT
The presentation be noted.