2024 Q4 Investment Review | Ruffer | Investment management

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Articles by Jonathan

Jonathan Ruffer

Founder Emeritus

2 January 2025

At the end of 2024, Ruffer has failed to meet its objectives for clients for a second year in a row – that is the fact. The key to an appropriate reaction is, however, to be found in the surmises.

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.

#inflation, #inflation-linked bonds, #regime change

Articles by Jonathan

Jonathan Ruffer

Founder Emeritus

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

T +44 (0)20 7963 8123

Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

Past performance is not a guide to future performance. The value of the shares and the income from them can go down as well as up and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This article does not take account of any potential investor’s investment objectives, particular needs or financial situation. This article reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer

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Ruffer LLP
80 Victoria Street
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Directions | Map +44 (0)20 7963 8100

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300 Park Avenue
New York NY 10022

Directions | Map +1 917 947 3003

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31 Charlotte Square
Edinburgh EH2 4ET

Directions | Map +44 (0)131 202 1602

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