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Jonathan Ruffer believes his fund group's heavy exposure to banks and insurers should protect returns if his long-held belief in the threat posed by resurgent inflation is wrong.
The Ruffer Investment Company (RICA) investment trust's biggest position, at 27% of the portfolio, is in index-linked gilts, to protect against this. But the fund's shares portion also features a heavy weighting to banks and insurers, which runs counter to the overall conservative approach of managers Hamish Baillie and Steve Russell.
'In the event of a dislocative fall in the markets, these would not do well, but there is a possibility that after 10 years of anaemia, the world sees a burst of coordinated real growth, without, for the moment, any inflation,' Ruffer said.
'The financials are not priced for this at all, and could be expected to be very strong. Their virtue will be to protect the portfolios from assets which would fall in this eventuality.'
Among the parts of the portfolio that could be expected to fall in this scenario would be the position in index-linked bonds, especially the long-dated portion of this position.
'We could see extreme circumstances where they lose the majority of their value (circumstances which would drive the financials up by an equivalent amount), or multiply by around 30 times,' Ruffer (pictured) said.
'The financials are there in size to protect us from being "wrong" on the inflation call. I put the ‘wrong’ in inverted commas, because it is perfectly possible that it will be the onset of deep deflationary conditions which causes governments and central banks to do those things that hasten a long period of high inflation.'
The Ruffer investment trust's conservative positioning has seen its shares trade sideways over the last, up just 2.1% while global markets have rallied 12.5%.