In conversation with Chris Bacon

Fund Manager Alexander Chartres sits down with Investment Specialist Gemma Cairns-Smith to discuss the challenges facing investors in a more fractured global landscape. They cover the journey to this more multipolar and harder‑edged world order, its new power dynamics, and the renewed importance of real assets. They also discuss the skills investors need to survive in this hard new world. READ THE ARTICLE DOWNLOAD TRANSCRIPT]]>

What really drives the economic cycle? It’s not the total amount of debt – it’s the rate of change of new borrowing. Investment Specialist Gemma Cairns-Smith sits down with Ruffer’s Head of Macro Strategy Michael Biggs  to explore his research into the credit impulse — the change in new borrowing that drives economic activity. Mike explains why this signal is widely misunderstood, what it reveals about the UK’s shifting interest‑rate backdrop, and where the biggest opportunities and risks lie as credit conditions turn.   READ THE ARTICLE DOWNLOAD TRANSCRIPT]]>

In this thought‑provoking conversation, Ruffer Chief Executive Chris Bacon discusses the idea of Risk backwards: that comfort, conformity and ‘blanding’ can create the illusion of safety while increasing vulnerability. Chris shares lessons drawn from different decades of life, explaining why disruption can be an advantage, how to cultivate independent thinking, and how Ruffer’s philosophy embeds these ideas in both culture and investment practice. Read the article ]]>

It was a forward-looking review, which is unsurprising, given that Ruffer at the time had no history – we were a business trundling slowly down the runway in a light plane on a long journey. As I approach retirement, this will be my last formal review – the pen may be silent, but the thought processes will continue. I shall continue to meet with my former colleagues, and will thereby find myself ensconced in the happiest of circumstances, having the power of articulation, but without any responsibilities. The history and theory of investing is as old as the history of warfare, and one might reasonably think that all that could be said of each of them has been already articulated. The greatest ‘insight’ to become a reality in the 1980s was Jack Bogle’s. It was a simple one: if you are happy with average performance, then why not enjoy an above-average performance by investing in a low-cost index-hugging mutual fund? This simple idea – which transcended any insight as to the nature of an investment – has changed the face of the investing community. It has conquered the world by its monopoly, shielded from greedy competitors by its negligible price. In modesty, I have to concede that an idea which now controls some 40% of the world’s equity and fixed interest markets is better than my contribution to the efficacy of investing. Ruffer Investment Management’s first glossy brochure stated that our investment strategy consisted of running risk portfolios which were designed not to lose money in any calendar year. Even accountants know that risk amplifies risk as well as reward, thus only riskless assets can claim to be free of the poison of capital reduction. And here was Ruffer, with no track record, saying you can have your cake and eat it. The universal response: Jonathan Ruffer’s a lovely guy (I can only agree with that assessment), and what he’s offering, if achieved, would be wonderful. But something that is too good to be true is, er, well…not true. That was in 1994. In the event, it took until 2018 for our first failure to meet our objectives, although some years effectively produced nothing. The going has been more volatile since, with 2023 falling far short, but our long-term track record still puts to shame the riskless alternative of cash in the bank. We don’t know ahead of time which opportunities are going to be the actual winners, and which the losers – the gold and the fool’s gold are intertwined in an inextricable embrace.  In 2023, we found ourselves accused of not doing what we claimed to do – almost as if ‘cake and eat it’ was something that could be achieved faultlessly. Despite the head wound I felt from letting clients down that year, it was hard to escape the feeling that this way of investing has come of age. When I began, our investment disciplines were as much intuitive as rigorous. Today, they are incomparably better – so much so that I find myself (against all the evidence) lost for words. It has been a pleasure to report meeting our objectives strongly in 2025, a year which has increased the long-term track record of Ruffer. How risky is the strategy? At one level, we concede that our aim not to lose money in any given year is a parallel claim to most professional investors’ ambition to ‘beat the indices’. That ambition is accepted as an aspiration, and even the very best will achieve it only intermittently. The ‘beat the indices’ target has a defect in that, in the ebb and flow of performance, at certain intervals the bad investment professional will look rather good, and (of course) vice versa. So, for an investor adequately to gauge whether their decision to hire a manager was a good one or not requires a commitment of an unnervingly long duration. Ours is by contrast an absolute target, judged annually. We can safely be sacked much sooner than our index-related competitors. What, then, are the characteristics of what we do? The only reason it works is because investments routinely, regularly, become either too cheap or too expensive. Whilst only riskless commitments guarantee no loss, all of us can see that the imperfections of a real-live market allow for an imbalance of risk and reward, some favourable, some unfavourable, in specific investment opportunities. There is, of course, always an elephant in the room. We don’t know ahead of time which opportunities are going to be the actual winners, and which the losers – the gold and the fool’s gold are intertwined in an inextricable embrace. While each individual opportunity might not give up its secrets as to future performance, it is often possible to juxtapose two (or maybe more), which removes the unknowable risks and offers each-way upside. The ideal might, for instance, be a set of investments which do well if the oil price goes up, and a different set which will create outperformance if it goes down. In this simple example, the result is to create a different risk (eg political risk), which must then be considered separately. As a result, an investor in the Ruffer strategy is diversified away from market risk, and left with the risk attached to our judgements of juxtaposing assets and portfolio construction. That is the skill we employ. While the strategy is simple, the execution is often complex. What we took for wisdom 18 months ago has turned out to be so comprehensively wrong that my generation really don’t know what to think, and hum the tune from ‘My Fair Lady’, ‘Just you wait, ’enry ’iggins, just you wait!’ Today we see a world where the thoughtless control the show and are making hay. A world where there is a generational battle going on, where the greybeards look at that world with incredulity. What we took for wisdom 18 months ago has turned out to be so comprehensively wrong that my generation really don’t know what to think, and hum the tune from ‘My Fair Lady’, ‘Just you wait, ’enry ’iggins, just you wait!’ Unlike my daughter, who is an academic neuroscientist, I haven’t quite got to understand how the brain works. But I find one quirk of the brain vividly fascinating: when humans think that some futurity is absolutely certain to happen, that thought cannot be disconnected from a second one – that the future event will happen very soon. It is well understood that the generation now known as Boomers – those born before 1965 – have a larger share of the asset gravy than the generations which have followed. Today, to be in the top 1% of UK earners by income, your take-home pay would be around £90,000 per year; to be in the top 1% by assets, you need to own nearly £4 million, a sum which would take the 1% incomer over 44 years to accumulate if they spent not a penny in the meantime. This means that, for the first time since Magna Carta, people are not as well off as their parents, especially in the realm of housing. A successful professional, mid-forties, can see that the capital sum required to buy the house they grew up in is multiples more than they can afford, whether in cash or by borrowing. Suppose such a person has capital of £400,000, and the house they want is £1.8 million. There is no point going to a conventional fund manager who is pleased with a double-digit gain. What good is £440,000 when the purchase of a family house is required? But, if one is prepared to make an educated and well-informed foray into crypto, or AI, and achieve 25% a year, then it will have tripled in five years – and many of their contemporaries seem to have been doing this successfully for ten years or more. The only golden rule in this approach to investment: ‘Never look down!’ There will be sickening crashes and, if you try to analyse why, you will of course be strongly tempted to lose your nerve, and cash in. A lot of people made that ‘mistake’ in 2018, quite a lot in 2020, rather fewer on Liberation Day (6 April 2025), and today the warriors, as a cadre, will not make that ‘mistake’ again. This market will go on incredulifying the greybeards until it doesn’t. There’s a great line in JK Galbraith’s book on the 1929 crash, when he describes an eminent economist as ‘standing his ground’ before adding ‘but unfortunately the ground gave way under him.’ This moment is inevitable, but it need not be at all soon. If it is long delayed, it will represent salvation to those who put the motorised engine onto their monetary barge and achieved what was necessary. The question in my mind is what is its aftermath? If the uncertainties and dislocations can be managed, then, yes, there will be losers, many of them, and there will be many winners, too. But, if it undermines the very fabric of the financial system, as was the case in 1873 and 1929, then the catalyst can be a mere water pistol and not the true weapon of war. In that case, the participants – the economy, the families going about their business, the high hopes of the young, the conservatism of the old – will find that the ground on which they depend gives way. The longer animal spirits control the market, the greater the ultimate confusion.]]>

When I was a student, I gave my worldly wealth of £200 or so to an ignoramus stockbroker in the City who specialised in hot stocks. He didn’t do well, but he didn’t do that badly either. I undertook some basic analysis as to what was going on (perhaps I would have been better-advised to have done that before engaging him); what I discovered is that he was so slow on the uptake that he bought into investment ‘certainties’ as the excitement was subsiding, providing him with a better entry point than his sharper colleagues. This point of detail came to me while wrestling with the relationship of knowledge with investment success. Why, for instance, are the cleverest economists not the richest? I think the answer is twofold. The correct answers to the most interesting questions are educated guesswork, and where it is possible for an expert to have a precise grasp of the likelihood of a particular outcome, the right answer isn’t significant enough to lead to a major investment opportunity. And because most investment decisions are binary, there is a 50:50 chance of being accidentally right in the short to medium term – perhaps an 18 month timescale. So bypassing the absolutism of true knowledge isn’t a showstopper. Many analysts in the City are the successors of the wizards in the royal court, employed to ascertain whether the royal birth would result in an heir. The answer was always yes, and half the time, it was right. It’s possible to be right more than 50% of the time, since the most likely thing to happen in the stock market is a repeat of what has just happened – it’s called the momentum trade. Although the blade of this way of investing is double-edged – it can make markets spiral downwards as well as grind upwards – it is universally understood to be a bullish phenomenon today, since the market has gone up in pretty much a straight line from January 1975: half a century. Bear markets have been sidelined. Instead, the relentless climb of Wall Street and the rest have been punctuated by crashes, which have – in nearly every case involving the major markets – bounced back again in short order. But the racing certainty is that, at the true inflection point, the market is much more likely to fall chaotically (at first), rise back up briefly, and then decline again relentlessly. Hence our preoccupation with the flak jacket to sit alongside the parasol. Let’s spell that out. To the current generation of investors, taking risk pays off – buy to the sound of gunfire! It is hard, though, to buck human nature, and the crevasses are visceral events – they are, like King Lear’s threats, the ‘terrors of the earth’. Every crash takes out some fools, but not the foolhardy – they have learnt to close their ears to the ‘fundamentals’, which are as fugitive as the Siren songs from the beautiful enchantresses who would seduce Odysseus. Thus the first thing to avoid is being the coward when the jingle says, ‘Buy! Buy to the sound of gunfire!’ But the jingle has a second part to it – ‘Sell to the sound of the violins!’ That is as hard as purchasing in adversity, and – most importantly – for 50 years it has also been wrong to do so. So the violins are held in the pending tray, and investors try not to mourn their mistakes – selling Microsoft in the late 1980s (at least I owned it…), thinking that the bull run was over in 1987, 1998, 2007 – and so on. What a bleak picture this paints, inviting the fund management industry to dwell on the design fault human beings endure – that we cannot predict the future. And yet we have nothing but fraudulence to offer our clients if we believe that we have no value to add, being merely the wizards in the court of the king who wants to know what kind of heir is to be born in the months or weeks to come. It is debt which kills off empires. The bigger the empire, the longer it takes, and the more money is thereby lost by the faithful What can we bring to the table which will show up in performance that more than pays for its keep? We have guiding principles which, while on occasion difficult to keep to, are nevertheless worth having as companions. Among them is the idea that the valuation given to an investment is more important than the attractiveness of its fundamentals. This is the opposite of an investment strategy born of momentum, which ignores valuation, and puts all the emphasis on the story. It is nearly always the case that high valuations cluster around things unknown – two examples of that are the Magnificent Seven tech companies, and gold shares. The former we own in tiny size; the gold mining stocks by contrast are a key part of our Praetorian guard. We eschew the tech stocks almost entirely because of their valuations, subjective as they are – not because the outlook for the fundamentals of those businesses is poor. In the gold miners, we have substantial positions (recently reduced) because the gold price is a mysterious beastie, but it is a store of value at a time when currencies may not be as roseate as they have been in the past. On top of these guiding principles are what we consider to be areas of significant interest. First and foremost is the unsustainable level of government borrowing. Almost no Western country has escaped the nettles of over-indebtedness, except Germany, who is busy making up for lost time by doubling its debt burden. The supposed policemen of inappropriate debt levels are the rating agencies, who spectacularly failed to spot the problems in the mortgage-backed security markets in 2008 and are making precisely the same mistake again. Fitch has three countries rated at A+, but you have to be a village in the canton of Debt-Ratingen to have the first clue whether this is high or low; whether it is of interest or ‘for enthusiasts only’ – the code word for terrifyingly awful historical renditions of classical music. France has just been demoted from AA-, and Italy and Spain promoted from A (a jolly prime minister in Italy, Buggins’ turn in Spain). It is debt which kills off empires. The bigger the empire, the longer it takes, and the more money is thereby lost by the faithful – 17th century Spain comes to mind, and Britain in the 1960s, whose former Commonwealth countries were encouraged to deposit their capital in London – capital which was then subject to the consistent haircut of devaluation. Quite a good test as to what has happened to Britain over the last 60 years is to compare the metal coins of Switzerland and Britain. The Swiss five franc piece (worth about £4.65 today) is, give or take, the same size and look as the 1965 Churchill crown (five shillings or 25 pence). In 1965 they looked the same because they were worth the same, yet sterling has declined by 91% against the Swiss currency in the time since; one wanted to own the five franc piece, not the Churchill crown! The least interesting way of getting frightened about this is to take the figures themselves; rather it’s that the devaluation has been invisibly yet relentlessly painful for the holder. That the surge in money supply in covid and its aftermath hasn’t yet resulted in greater problems is simply testimony to the fact that there are no roadmaps in uncharted territory. Fifty years is a long time for a market to go up, from once-in-a-lifetime cheap to the exact opposite What else interests us? The West has been living off the workforces of poorer countries who will do jobs those with a more precious sense of their worth choose not to do. Now this golden stream of goodwill is regarded as an existential danger and must be repatriated. To the seasoned market watcher, this translates, before long, into a change in the nature of th workforce; it will be locals in Britain who do the crop-picking, the bed-turning and the bus-driving. Here’s a question: do you think they will do it for less remuneration, anxious as they are to do their bit for their country? Or do you think that, having the fruit farmer, the NHS and the transport system over a barrel, they might want a tiny bit more? Tariffs also interest us, because historically they acted as a handbrake on activity. To us, they are an accelerator of a phenomenon which has been around for some years – the end of the optimised ‘just in time’ supply chain, which kept costs to a minimum, but fragility to a maximum. Add a third element, the onward advance of technology, notably AI, which is a really big deal. Add a fourth to that, the crusade against fossil fuels, which means that the automobile industry doesn’t know whether it was a mistake to replace petrol with a different pollutant in diesel, or whether electric cars (which may or may not be self-driven) are the future. All this undermines the traditional manufacturers, and allows China to pick and choose which Western enterprises to torpedo. If this feels fanciful, it is exactly what happened to Britain in the second half of the 19th century. Overtaken in pretty much every industry, it was able to hang on to its financial pre-eminence for another 50 years but by 1945 the game was up, and the direction of travel for the UK was down. Fifty years is a long time for a market to go up, from once-in-a-lifetime cheap to the exact opposite. It’s a mug’s game trying to balance out the relative advantages of the following wind of momentum with the knowledge that, one day, there will be a reckoning of no little magnitude. Indeed, if we call the timing of that reckoning right, we are most likely doing things wrong, since our job is to hold both possibilities in tension, and to make consistent positive returns, whatever the weather. As part of Ruffer’s long term succession plans, our chairman Jonathan Ruffer has announced his plans to retire in December 2025. This marks the final step in a phased transition that began in 2010. Henry Maxey will become Chairman of Ruffer in January 2026 and will continue in his role as co Chief Investment Officer (CIO). Responsibility for investment decision making at Ruffer is unchanged. Read more]]>

This review explores what we can (and can’t) infer from today’s facts about tomorrow’s markets. Our aim is to get a bit further than Pierpont Morgan: when asked to predict where the markets were heading, he replied, “They will fluctuate.” At Ruffer, we claim to be all-weather investors. In recent years, we let the side down by being overconfident of an approaching handbasket from hell. We dropped our guard; the market went up, and we went down – a mistake we seek not to repeat. The latest quarter’s out-turn should be a double encouragement to those who wonder whether we have learnt our lesson. Predictably, perhaps, we were strong in the poor markets earlier in the year – but, when the markets recovered in Q2, we continued to drive forwards. It might of course be a Swallow, but we trust it’s an Amazon. Common sense suggests the market should be subdued. Wars and rumours of wars are not good for GDP growth. Taxes on trading activity such as tariffs reduce, in absolute terms, the amount of goods traded worldwide, and redirect money from the optimal trade channels into the brackish canals of fiscal spending. Towering over these man-made dangers is the accumulation of debt, which for years and even decades threatens a ghastliness, until, to everyone’s amazement, one day, it actually becomes one. I had a friend who was on a small boat returning from Dunkirk in 1940, pursued by an unfriendly aircraft which sprayed the craft with machine gun fire. I asked him what he was thinking about when all this happened. His answer: a determination to stay alive so he could invest in Marks & Spencer, on the basis that, if the war was lost, the investment was the least of his problems, and if it was won, it was a great entry point. Not having a Bloomberg screen, he didn’t of course know at what level it was trading – but he rightly divined it would be cheap. The point today is that, despite all the uncertainties and bad news, the market’s valuation matrices are banging on pretty much all-time highs – we live in strange times. When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?” I think to establish an answer, a different approach is required. Rather than assessing the world’s health through the discounting mechanism of the market (which ‘knows’ everything), perhaps there is a dynamic at work which is independent of that discounting mechanism. The investment universe has democratised. When I started as a stockbroker in 1972, it was the man from the Prudential and Mrs Tufton-Bufton who drove the markets; one professional, one sentimental. The federated Stock Exchange – not consolidated until 1973 – ensured local companies were supported by local families, and it was a patriotic duty to lose money by investing in War Loan. Today, there are new forces of dominance: the clever clogs who run hedge funds, the purveyors of private equity and now, since constipation has set in with PE, private credit. Wealth managers have replaced private client stockbrokers. None of these have fundamentally changed the way markets operate, except they mostly seek to derive returns from anything other than traditional equity markets and in so doing foreshadow a world where equity returns may turn out to be persistently weak. That phenomenon, when it becomes evident, will be regarded as an event which predates, not postdates, today. When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?” On top of this, a disconnect has grown up between different generations in the West. The shorthand to this is highlighted by the segmentation, by age, into Boomers, Generation X, millennials and kiddos. It is a commonplace that the Boomers may not actually be bandits but they have made out as if they are. They pride themselves on being born before 1964. The generation behind them – the vanguard now well into middle age – are dismayed at being unable to buy the sort of houses their parents own; the cream of everything from Picassos to places in the sun seems to belong not to them, but to an older generation. Here’s my take on it. There is plenty of wealth within the younger generations – but not nearly massive enough to emulate the generation which came before them. Many have money to invest, for sure, but it has to work quickly – successful investment demands the uplands to be sunny, and constantly benign. Those who think like this are the cadre who hold the Magnificent 7, and they trade recherché instruments which can, with a following wind, bring those who own them into Boomerland. Thus five years of making 40% a year starting with £200,000 gets you to over £1 million – and then you can throttle back a bit (even if in practice you don’t). How will it end? Suddenly. When? Next question please. Does this way of investing look foolish? If the cliché about pudding and eating is valid, then it’s not at all foolish. Investors have had more than a decade of this class of investment, winners experiencing enough thrills and spills to remind us that true belief is rewarded, cowardice punished, inactivity guaranteed to be a wasted opportunity. And they have firepower: retail investors put in $4.7 billion the day after President Trump announced Liberation Day this April – a day of market turmoil, which indeed proved to be a great opportunity to make money – and they took it. The US market rose by over 20% in subsequent weeks. ‘Wise’ investors see in them only the ‘the madness of crowds’. But it is wisdom which has been trampled. In a generation’s time, the score card might vindicate the wise – but you can’t eat score cards. How will it end? Suddenly. When? Next question please. But ‘suddenly’ is a helpful roadmap: there will be no warning, so one has to leave early, as we have, and the mind which has ridden the wave is trained to avoid any such equivocation. It has always interested me that the story of America’s Great Depression in the 1930s begins with the Wall Street Crash of October 1929, when it was estimated there was record participation in the stock market. What is typically forgotten is that by April 1930, the US market had recovered quite close to 1929’s all-time high, before it re-started its precipitous fall – some of the participants had to learn their lesson twice over. The point being that there is a lesson to learn, either ahead of time, or not. ‘All-weather’ in our book is about the duality of constructing a portfolio protected against crises but looking to keep that protection embedded in a portfolio that can offer satisfactory returns in the meantime. One of the insights of Nassim Taleb (of Black Swan fame), is that the best insurance against heart-stopping hiccoughs is what he calls ‘antifragile’ assets – investments which do well when everything is going badly. They are non-plussingly difficult to find. Lenny Lauder spotted that even in a terrible economy people still treat themselves to little luxuries like lipstick, and he thereby continued the success of Estée Lauder for another generation. The cinema chains in the 1930s prospered for the same reason, cigarette manufacturers too. But there are not many such assets, and the identification of new candidates needs a dose of contrariness even to imagine that they might exist. It is in the derivative markets that antifragility can be most clearly identified, and priced. Put options on the markets, instruments that are long of volatility, derivatives anticipating a higher yield spread on the brands of top notch businesses – all find their way into our portfolios. In the past, it was rather different – one could select cheap companies to play this role. Dairy Crest, for its cheese mountain, Thames Water for its safety (!), Howard Shuttering for its name. New conditions need new skills, and my job is to imagine a wisdom to sit alongside the other insights which combine to create market knowledge. One last thought, on inflation. All the inflation watchers I see in action would benefit from the information set out in tomorrow’s newspaper. Some think inflation far from dead, others that we might be looking at deflation (prices going down). I’m not very interested in all of that, because it depends on guessing the unknowables: what will happen to workforce numbers, to interest rates, to currency movements, to food prices. I am more interested in what is unseeable, over the hill. Wages as a percentage of corporate costs in the US and Europe are at generational lows and, if immigration proves restrictive, that could change hard and fast. More certain, the balkanisation of traditional industries will create profitless price rises. Put simply, globalisation lowered prices and thereby lowered inflation, and a return to local production reverses that dynamic. We began with the waves of markets: the waves of inflation are longer, slower, and more inexorable. We may yet see a brief dalliance with deflation if markets fall, but it would be misleading: I have great confidence in the eventual inflationary outcome. The deleterious impact on asset prices of being right about that will be significant, so protecting against it commands attention in our minds and in the Ruffer portfolio, distant as it may still be. To reiterate: all-weather means combining shock-resistance with satisfactory returns in the good times. We hope to continue to evidence the good behaviour shown so far in 2025.]]>

He climbs onto a water barrel to elevate his harangue. In mid-peroration, the wooden struts at the top of the barrel give way, and he ends up head and shoulders sticking out of the water. Everybody laughs and jeers. Then a shot is fired off screen, and he slumps lifeless in the barrel. It is a great scene, illustrating, theatrically, a time when everything changes – in that moment, there’s regime change. My colleague Matt Smith used more colourful language to describe today: “Everything has been smashed up” – the 1941 Atlantic Charter (progenitor of NATO), the Washington Consensus, the pax Americana. The world we have known is changed. And, like the giraffe I de-stuffed at the age of four, the stuffing is not going to be restored to its old order. We sort of know that – but we don’t yet sense it. Sir Niall Ferguson, one of Britain’s great historians, made his name in the financial world by tracking stock markets from the assassination of Archduke Franz Ferdinand on 28 June 1914 to the start of the First World War – 1 August for Germany and Russia, 4 August for the British. He observed that it was not until the end of July that markets really perceived the existential threat to the world (and, ergo, the world economy). The implication he drew from that was that markets were pretty cloth-eared as to the risks which were on show. I rather think it should be exactly the other way around. Investors took comfort, throughout those weeks, that there was no market collapse, so the common knowledge was that these extraordinary events, plain for all to see, were ‘priced in’ to the market. And, as things quickly became worse, there grew to be a belief that the fundamentals of the economies of the world must be prodigiously strong to hold up in the face of this deterioration. This 1914 view was shared by the Bank of England, which granted ‘accepting house’ status to my family’s bank, A. Rüffer. So, the following week, when A. Rüffer (with all its assets in Germany and all its liabilities in London) went bust, His Majesty’s Government had to underwrite the losses of £1 million. (The National Debt was then £709 million – it was an expensive mistake.) The same could well be happening today. The danger of a financialised marketplace is that risk is interlinked, so that trouble in one place is instantaneously trouble in a series of other places. If the sea level rises, one can anticipate obvious trouble in East Anglia and Venice. But, when great inland lakes appear, the sheer unexpectedness adds meaningfully to the sense of nervous uncertainty. A startling statistic was published a few months ago by the American Association of Individual Investors, which showed that 64% of American citizens owned US equities. It is a chilling echo of one of the features in 1929, when public engagement in the equity market (much lower in percentage terms, of course) was a contributing factor to the malaise of the depressionary 1930s. That two-thirds of the American people have investments in the prosperity of their homeland is a sign of confidence – confidence which is the engine fuel of prosperity. Such optimism is, however, compromised by the overlay of intergenerational tensions in the Western world. My generation (I was born in 1951) bought houses at prices that were affordable; our children and grandchildren have no opportunity to do the same. With every year that passes, the ranks of those excluded from the property-owning classes grow. This social problem is a scandal, of course, and scandals have a habit of creating eructations in unlikely places. The mood I sense is that often the only hope of those disposed to make money is to play the markets while the sun is still shining: no time to be owning Colgate, the toothpaste manufacturer – better to take risks on high-growth businesses which, if successful, will generate high rewards. Financial markets have a remarkable habit of turning good companies into bad investments” When it comes to predicting future returns from an investment, I believe securing a margin of safety in the valuation that one pays for a company’s stock is a much more important factor than whether investors are correctly assessing the future growth prospects of the underlying business. Put another way: financial markets have a remarkable habit of turning good companies into bad investments. In my last Investment Review, I compared two previous manias – the Nifty Fifty and the dot.com bubble. The Nifty Fifty is an almost perfect example of this truth. The question, all those years ago, was: which are the best companies in the world? The answer Wall Street gave was pretty much spot-on – a generation later, those businesses were strikingly the ones which had continued to be world-beaters. The problem was that purchasers paid what was in retrospect the wrong prices for them. We live, of course, in a world where the best franchises can be compromised by technological change. It is a hallmark of all super-profitable companies that either innovation or competition will compromise those profits eventually. One must be aware of this – and look for opportunities amongst the new predators. But we are nervous of their valuations, and, anyway, hope is a tricky commodity to price. It is a hesitation which applies equally to traditional investments. Back in the 1970s, it could be assumed that technological breakthroughs would remain in the same corporate hands, as automobiles and electrical appliances largely did. Today it’s wiser, perhaps, to assume that one must be agnostic as to who the beneficiary will be. The market is full of future winners and losers, so I judge expensiveness less by the eye-popping valuations of the AI stocks than by the valuation of the market as a whole. I am particularly interested in the price to sales ratio of the market, because the valuation of a corporation can’t be fudged; nor can the sales figure. A high price-to-sales ratio is justified by today’s investors as the natural state for companies with terrifically high margins, but in that margin assumption lies an equal amount of the danger. In the days of my innocent youth, a price-to-sales ratio of more than 1x was an amber light. Today’s US equity market briefly moved through 3x in late 2021 and again late last year. Who knows what colour a light that is, but for our money it’s certainly not green. If I return to the world that is broken, it is not always the case that nemesis follows swiftly. Did the Second World War start in September 1939? Or in May 1940, when western Europe was overrun in six startling weeks? The gas masks which had been issued to the children of London at the outbreak of war did not face the bombers for another year – and, in the event, they turned out to be the wrong sort of protection. Many investors hope for a setback, even a biggish one, because they feel they have a secret weapon – ‘buy the dip’! The best investment strategy is, of course, one that is not shared by a large number of other people. But, that aside, there is another reason to think hard about a strategy which first worked in 1987 and has worked every single time since. The enemy to this way of thinking is not contrariness of thought; buy the dip is after all a mechanical exercise. The danger is that in every iteration more people do it, and eventually they forget what the reasoning was in the first place. Success breeds complacency: the strategy becomes obsolete simply from the dynamics within it. What’s the evidence? The world has become increasingly, excessively, leveraged. Governments have higher debt to GDP ratios than ever; Germany, a rare exception, has just given itself permission to join the party. Investors, too, are extended; the latest hedge fund data shows their gross exposure to be in the 100th percentile – in plain English, highly indebted. This compromises their ability to buy the dip; after all, what’s the use in spotting a gap in the enemy lines if you’ve already committed all of your troops elsewhere? To top things off, there is in this cycle a crucial dynamic at play, one where falling markets create the recession. Conventional wisdom regards the stock markets as a leading indicator – predictive of future events. Markets are not always right, of course, as evidenced by the economist Paul Samuelson’s famous quip that the stock market has predicted nine out of the last five recessions. Forecasting requires of its analysts a series of predictions – often fan-shaped, to reflect a multitude of different outcomes only one (at most!) of which will, in the event, occur. It is a flawed model: analysts know that surprises routinely upend their peacock tails. What is not properly considered is that the course of events in the real world are often determined by severe dislocations in the financial markets which have already occurred. This calls not for a gradient ‘fan’ of outcomes, but a binary model: the US economy can continue to grow at 2.5% if there is no dislocation; but it will contract, and sharply, if in a crisis the current high indebtedness compromises all its players. This is why the commentators who write about the Depression in the 1930s start with the story of the Wall Street Crash in 1929. There have been plenty of crises before and afterwards, but only the Panic of 1873 seems to have shared the 1929 characteristic of not only foretelling but actually being a major contributor to the hard times to come. The world we are left with today is one that features equities at maximum valuations, investors at peak investedness and now a new feature: a perceived but not yet digested regime change. As markets begin to sense the impossibility of the first two co-existing with the third, they will fall, and where they go, the economy will follow.]]>

Fund Manager, Steve Russell discusses the investment risks we see in 2025 – overvalued US markets, Trumps return to office, rising bond yields.   DOWNLOAD TRANSCRIPT]]>

If I put myself in the other person’s shoes – the client’s – what would I be thinking? And that, of course, should be a routine transposition. What the servant thinks is neither here nor there – what matters is to see it through the master’s eyes. If, then, I were the client, I would want to make a judgement on the following three things. First, are the people at the helm the same people who have been there for ages, or am I being looked after by a bright button who is learning that investment is not as easy as it looks? That’s an easy one to answer. Henry Maxey still leads the investment process – he joined me in 1998; from 2003 we acted in concert, he becoming de facto the lead investor in the course of the 2008 crisis, and he has been at the apex these last 16 years. Second, has this period tested the character of the decision makers beyond endurance? Have they lost their nerve? Are they looking for ways of appearing to continue their set strategy, but actually doing something else? Reading my past Investment Reviews, it is clear (as it always is) that the world is playing out in a continuum, and the portfolios will necessarily change as we respond to the changes inherent in an unfolding world. That continuum is one where the uncertainties and, even more than the uncertainties, the distortions have not gone away – they have grown both more diverse and more acute. So the character of the portfolios has remained the same, but they currently reflect acute, rather than merely chronic, danger. Which leads to the third and more difficult question.  Third, are Ruffer living in a world where they shake their fist (with other people’s money) at a market clearly less astute, less thoughtful, less exquisitely brilliant than themselves? I wish I can say that we are as sharp, flexible and humble as we need to be to succeed; of course, we are not. Some mistakes stem simply from having to take views on the unknowable – every investor suffers from these infelicities constantly. But, when our investment stance requires protection, and protection is readily available in conventional assets and yet we fail to take advantage of them, then I judge us to be culpable.  The prime example over the last two years was our failure to buy Japanese exporters, when we had in the portfolio a large position to benefit from a strengthening yen. The yen continued down and the exporters went up. Had we put, say, 4% of the portfolio into these equity offsets, we could have regularly harvested solid gains, and retained our 4% holding for that full period – I estimate that it would have returned the equivalent of one year’s worth of interest on sterling cash; we didn’t do it, because we were particularly concerned about the danger of equities as an asset class. The omission of that single error would not, single-handed, have rescued our performance as regards cash-plus returns, but it would have helped considerably.  My takeaway, then, is that hindsight makes fools of an underperforming fund manager, but given this situation, it is important that we have lost neither the reef nor our nerve. It is not by accident that we still have a portfolio which can take full advantage of a system shock of some magnitude. Why can one say that, without arrogance? It relates in three words to the price level of the main American equity market: the S&P at 6,000. We were positioned for a dislocation when the S&P was rather lower: that was wrong, but not perverse – the nature of bubble valuations is that they somehow offer subliminal validation on the journey towards the moon. The US equity market is the outstanding outlier on valuation, largely as a result of the new generation tech stocks. Overall, the S&P is standing on a forward multiple of 23 – close to the highest in its history, matching the rating it was on in 2000, and that did not end happily. Were the market to trade at 15 times forward earnings (ie S&P at 4,000), and the earnings themselves were to drop by 20%, the market would halve. Why should earnings drop in an economy which seems strong? Sure, the economy could hit an air pocket, but a more cogent reason is that margins have been high – much higher than economic growth. Margins can drop for several reasons – but the effect on the market if those of the ‘Magnificent Seven’ did so would be remarkable, as those stocks account for a third of the market value of the S&P. Their inroads into the traditional sectors might reverse, but, just as the de-rating of ‘old America’ has not stopped the inexorable rise of the S&P, a bounce back of earnings from the victims of AI would not compensate from the earnings drop and consequent derating of the AI Angels, nor would it make those mega-cap Angels cheap enough to buy on valuations generally seen in the last 100 years of stock market trading. To my mind it is instructive to compare and contrast two separate bear markets, since they give a clear view on what to look at in assessing today’s overvaluations. The first of those concerned the fall from grace of the US ‘Nifty Fifty’ stocks, which led a charmed, and highly rated, existence through the first half of the great bear market of the 1970s. The second was the break in the dot.com boom, a break which began on 29 February 2000. Each of those saw investors get one thing right, and one thing wrong. It turned out in both instances that the wrong comfortably outweighed the right. Overall, the S&P is standing on a forward multiple of 23 – close to the highest in its history, matching the rating it was on in 2000, and that did not end happily. The Nifty Fifty found its justification from the world of boxing, where, it was said, ‘a good big’un beats a good littl’un’. The fifty were nothing if not big – they represented the great names of corporate America; over the life of the phenomenon, their ranks were almost unchanged. What went right for investors? The fifty that were identified truly were great companies. Only Kodak and Polaroid proved unsatisfactory – the others deserved, retrospectively, their pedestals. So what went wrong with the 48? It was, quite simply, that the stocks had been bid up to unsustainable valuation multiples. The recession didn’t do their earnings any good, either. One, Bristol Myers, came in with earnings which actually beat market estimates – but even its share price didn’t reflect this nuance, and fell with the rest of them: down 55% between 1973 and 1974. The dot.com boom was exactly the reverse. What investors saw clearly was that technology was going to up-end traditional ways of doing business: the talk was of online communication, and even the more rambunctious claims for this new way of living proved scarcely to be exaggerations. In short, the markets got the significance of the technological revolution right. But what the market didn’t get right was how to play this phenomenon, investing in young businesses which were as short of cash as they were of management expertise and customers. Connoisseurs of pond life will know that tadpoles in a jam jar show a high mortality rate, and pretty quickly – tadpoles need to be frogs to be competent at surviving. The same turned out, as usual, to be true of companies. Sometimes, the winners come from within the ranks of the previous monopolists. AT&T, the great American corporation, was, in its full name, American Telegraph & Telephone Company. The telegraph was obliterated by the more flexible later technology of the telephone – and that was replicated across the information transmission industry of the late 19th century. The telegraph businesses were both the victims and the beneficiaries of the advent of the telephone. An example of the reverse: not a single stagecoach business became a railroad monopoly, although George Hudson did sell all his stagecoach business to invest in the York railway in the 1830s. Which of these two great mischiefs will catch out today’s markets? Will the Magnificent Seven be like the losers of the dot.com bust, companies with the right idea but the wrong execution? Unlikely. They are enormously well-capitalised, which is the single biggest area of danger to a capital-hungry business model, benefiting from great change. Could the Herculean task of running these modern behemoths prove too much for a class of executives who have already proven themselves astute enough to be in a position to take advantage of their brilliance? Again, the curmudgeon could have waited in vain to see the real winners of the dot.com phenomenon fall on their faces. Not one to bet on. So I think those who expect a repeat of the 1999-2000 boom and crash will find they have dug their elephant traps in the wrong place. It is the other mischief which we see as the danger. It’s the fall of the Nifty Fifty – now over 50 years ago – of which we need to take cognisance. Pay too much for quality, and you’ve made a bad investment. If the fall is not a matter of private grief, but an unanticipated electric shock to an over-leveraged system (something we see as particularly possible), then the extreme likelihood is these great businesses – possibly aided over the long term by their ability to consolidate yet further their commercial advantage in bad times – will see earnings fall short of the expectations of the consensus.  Such instability was routine in the world I grew up in; it is something that will, some day, return. These words could have been written two years ago – but not, I think, four or ten years ago. There is a certain danger on one hand. There is, on the other, a pyrrhic victory of waiting an inexorably long time for a fear to coincide with an eventually present reality. We continue to skirmish on the bull tack; those assets that we pick feel like they have good days accompanied by bad weeks. Why are we – how can we be – so confident that now is the moment for safety first? Three words, already stated: S&P at 6,000.]]>

It’s an important question, and I address it because not only do I have an answer, but I believe it, too; it’s why I set the business up 30 years ago. We opened for business on 8 December 1994, and this Investment Review sets out, again, what we are trying to achieve. It’s fair to say that we are more concerned with preservation of money, so the market indices are not the primary competition – but the return on cash has to be beaten, relentlessly, constantly, and by a proper margin. Because of this cautious aspiration, we are sometimes regarded as ‘perma-bears’, and our claim to be all-weather investors is treated like the chippy who howls in the wind about his chips being ‘world class’. If we were indeed bearish all the time, the bull market which has played out over our entire existence would surely have polished us off; but it hasn’t, and indeed we’ve thrived through it. This brings me back to the ‘why bother?’. What’s the argument for holding Ruffer, just to have received a cash-like return? The answer is that, over the last eight months, clients have had a similar experience to the risk-free rate which is our true competitor, plus the possibility of solid returns from a dislocative market – conditions which conventional wisdom always regards as highly unlikely, but which nevertheless keep happening. Indeed, these dislocative episodes are the concomitant of a complete absence (since 1982) of any conventional bear market where prices drift consistently lower, with some rallies and sharper sell-offs. They have been displaced by markets which have gone up nearly all the time, collapsing periodically – only to recover again. Historically, we have preserved client capital in each of the collapses, deployed it in the ensuing panic, and therefore been well-placed to benefit from the recovery. My verdict? Great in the chicanes, but invariably underpowered on the straights. But now, we see fewer straights ahead of us… Every chef likes the smell of his own cooking, and the following observations talk our (cook)book – but we have the same skin in the game as our clients do. We see markets that are expensive, driven by powerful forces which want to turn a 40 year bull market into the first ever 50 year one. That trend is not one to embrace, but it’s dangerous to stand in its way. So we have half the portfolio’s assets in near-cash, and that allows more adventure in the other half. The conditions today feel similar to two earlier booms. One was the dot.com boom of 1999 where it was the extrapolation of good news, not the good news itself, which proved investors’ undoing: wrong valuations on often great opportunities. The earlier one was the 1987 crash, which was essentially (like today) a maelstrom of soaring markets colliding head-on with protections which, in the event, turned out to be more gun-pointed-at-foot than trusty gun dog. In today’s markets, we sense a lot of leverage, and very few Labradors. Those who follow markets closely will be aware of the sharp setback which occurred throughout the world on 5 August. That brought the naysayers onto the street in big numbers – but, by the time their placards were unfolded (‘We told you so!’, ‘The end of the world is nigh!’), the markets had recovered, and made up for lost ground. It was a very instructive time, and fascinating for us to see its pathology in the light of our dispositions. That summer storm showed how the water cascaded down from the high ground. At its centre was the sudden reversal of the yen from uncontrollable weakness to coiled-spring strength – strength which has been maintained ever since. Two of the last three investment reviews set out in extenso why we thought yen strength was a certainty, and why that self-same strength may undermine the health of the investment outlook throughout the world. It also transformed the other protections we had: the market volatility indicators tripled, more than seemed reasonable; credit spreads went up by 25%, less than seemed likely. If 5 August was, as we strongly believe, a dress rehearsal, then our portfolios have learnt their lines. The rest of this review takes a look at that second of our defensive investments – credit spreads – and explains what they are, and why they are essential ingredients in the stew. The central disadvantage in holding them is that – unlike most assets – there is an ongoing cost to doing so, and of course the more it costs to hold them, the more pressure there is to be right quickly. Set against that is one of the tenets of our investment philosophy: the more sure you are that a dynamic will occur, the less you need to worry about when it will come about. Nevertheless, we (and doubtless our investors) would like our credit spread investments to come right pretty quickly. So what are they? As an investment, credit spreads don’t pass the ‘does it do what it says on the tin’ test. Credit is the generic term for corporate fixed interest stocks, which might loosely be defined as instruments which give the holder an interest rate return on the money invested, rather than an equity (ie ownership) interest. Until the 1950s, all serious investment was about the evaluation of the safety of the borrower – the flakier the borrower, the higher the interest rate. When Schroders (fly-by-night bankers in the 1860s) engineered at that time the first Japanese loan, the interest coupon was 7%, a rate even higher than the reward for investing in the known volatility of South America and, I think, of every other national entity. ‘Spread’ is the articulation of that difference – the extra yield one receives for taking on extra risk. The spread is established when a bond is first issued, but market forces will, constantly reassessing the risk of the bond over time, move it to trade more expensively or cheaply against other securities regarded as having similar characteristics within the food chain. We see markets that are expensive, driven by powerful forces which want to turn a 40 year bull market into the first-ever 50 year one. From the 1950s onwards, as equities came to dominate markets, the centrality of this dynamic passed, and fixed interest joined the radio and the railways in the ranks of the Titans of yesteryear. But to us they are important once again: increasing leverage (aka borrowings) in financial markets has made these spreads, arcane to the rest of the world but pivotal within that village, a key driver of financial system stability. Most important of all is ‘investment grade’ credit – another gobble in this gobbledegook market. In the hierarchy of safety, investment grade bonds offer a higher interest rate than Government, but a lower rate than ‘high yield’ (formerly known as junk bonds!). Why do investors own investment grade credit? Because it provides a higher yield than the equivalent government bond, with an almost imperceptible increase in risk. Indeed one could happily argue that Microsoft (‘AAA’ rated, like the United States itself) has a much better balance sheet than the government. This sense of ‘something for nothing’ is endlessly tempting for investors: if I have spare cash to invest in government debt, why would I not put it in investment grade debt instead, and scoop the (slightly) higher coupon? What we own in portfolios is the spread – the differential in the yield between investment grade bonds and government bonds. Today the difference is about 0.5% or 50 basis points (bps); that’s a low level when the world is happy in its handbasket, but in a rumpus, it can triple, and trade as high as 150 bps over government. Why should the spread widen in a moment of market volatility? Because in a crash everything feels less safe: when confronted with uncertainty, investors invariably try to disengage from longer-term commitments in favour of safety and liquidity. And repeated historical crises have shown that US treasuries are safer and more liquid than even investment grade credit. So the level of credit spreads is currently at the low end, despite the over-borrowings in the world, and despite their inherent volatility suggesting that pricing them cheaply is dangerous. The investment grade credit spread asset class is in an index form, and the lower-quality end of its constituents are not (in our view) of investment grade at all. If there is a seize-up in markets, and the credit spread indexes move to reflect a higher spread – towards the top end of the range quoted above – these holdings alone would be expected to make well over a year’s return on the whole of a balanced portfolio at current rates. To be able to run these positions costs money – a precious resource, which looks like wasted money when the protection these instruments offer goes unneeded. Provided we are right that the events will play out as forecast – as they have each time in the past, with not one of them missed – then a dullish performance, matching cash, is an excellent risk-reward while we wait.]]>