The investment trust that could profit from the market turmoil

It has been a tough year for many investors with the markets struggling to cope with the transition to a new regime of higher inflation and lower growth. At the same time the shift from quantitative easing to quantitative tightening is draining liquidity from the system and increasing the volatility and absolute level of risk.

There are not many investment trusts that have the mandate and ability to profit from this sort of backdrop, with one of the few exceptions being the Ruffer Investment Company (LON: RICA). Its multi-asset portfolio aims to generate consistent positive returns, regardless of how the financial markets perform and has sailed through earlier crises virtually unscathed.

In his latest quarterly review, Chairman Jonathan Ruffer says that he cannot recall a more dangerous period in his 45 years as an investor. RICA has been carefully positioned to weather the storm with equities reduced to a record low of 14%, while cash and cash equivalents have been increased to 47% and illiquid strategies and options – a key differentiator – raised to an all-time high of 21%.

The coming storm

The manager thinks that pressures are building that could encourage the sale of risky assets and result in tighter liquidity in the markets. In view of this the firm regards cash and cash equivalents as extremely attractive and something that will allow them to make the most of any opportunities that come along in the aftermath of a crisis.

An important feature that sets it apart from its nearest rivals, Capital Gearing (LON: CGT) and Personal Assets (LON: PNL) is its material exposure to illiquid strategies and options. The broker Investec, who have a buy rating on the trust, believe that these investments have made a significant contribution to RICA’s impressive performance record since global equities peaked in January 2022.

In the period since then the MSCI All Companies World Index has fallen by 20.5%, with CGT down 3.8% and PNL losing 3.6%, whereas RICA has made an NAV total return of 3.5%. As we move ever further into uncharted waters, these ‘tungsten-tipped instruments for extreme danger’ could add significant value.

Nimble, sure-footed approach

Over the years the managers have demonstrated a nimble and opportunistic approach, with a recent example being the purchase of long-dated UK index-linked bonds at extraordinarily distressed prices, just before the Bank of England was forced to step in and restore order. The 2073 linkers subsequently rallied nearly 250%, while long-dated US inflation TIPS and conventional bonds, totalling around seven percent, were also added last month at attractive valuations.

In November 2020 they made headlines by making a big investment in Bitcoin, as they saw it as an option on an emerging store of value with a highly skewed and attractive risk/reward profile. They then sold out at a healthy profit when the excess liquidity looked to be peaking the following April.

The fact that Ruffer remains cautious on the outlook should be a warning to all investors to pay attention given that they have a strong track record of spotting market turning points. During the financial crisis in 2008 RICA delivered an NAV total return of 26% versus a 30% fall in the FTSE All-Share index. Could this be a precursor to what is to come?