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Ruffer provides investment management services for institutions, pension funds, charities, financial planners and individual investors.
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Why traditional safe havens might not work

In the market sell-off this February, defensive assets failed to defend.
The Green Line
Duncan_Macinnes
Duncan MacInnes
Investment Director

‘The only free lunch in investing’. That is how Harry Markowitz, Nobel Prize winner and creator of modern portfolio theory, described diversification back in 1952.

If diversification is to be effective, a portfolio will include assets that thrive in challenging times. The role of these ‘anti-fragile’ assets is to insulate the portfolio – they should rise in value in periods of market stress, when other assets are struggling.

The protective toolkit of assets traditionally includes US government bonds, the yen and gold.

This month’s Green Line shows how these safe-haven assets performed during previous periods of market stress.

Until this year, they have performed consistently well, acting as a shock absorber for portfolios. This has been true whether the market stresses were financial, political, global or local.

For example, in 2011, the crisis centred on the credit rating downgrade of the US government – yet US Treasuries still offered protection. In an ancillary blessing, these assets have also delivered strong returns to investors outside of crisis periods too.

Yet in February 2018, during a sharp market sell-off, each of these traditional protections misfired. As a result, conventional balanced portfolios had nothing to cushion their fall.

At Ruffer, we believe conventional balanced portfolios are now far riskier than they are generally perceived to be. This year, investors should think carefully about how their portfolio might perform should markets deteriorate.

We have been concerned about this risk for some time, and have put alternative safeguards in place to preserve our clients’ capital in the next market downturn. Investments with returns linked to a rise in market volatility, and to higher corporate borrowing costs, are giving us the protection we seek.

Japan: a forgotten market?
March 2018: Japanese shares have risen strongly, but not nearly as much as company profits.
Read
Misplaced confidence?
February 2018: US consumer confidence is very high. Our analysis suggests this is not good news for investors in equity markets.
Read

Chart source: Bloomberg and Ruffer calculations, data applies to a two week period following each event.

our thinking
Inflation: bad for portfolios, good for society?
As inflation has soared to its highest level for 40 years, financial markets have taken fright, with most bond and equity markets down significantly so far in 2022. In fact, the US is now officially in a bear market, and inflation pressures show few signs of fading – quite the contrary.
Swimming naked
July 2022: It is hard to overstate how far free and unlimited central bank liquidity has rewired the financial system. As central bankers extract themselves from the monetary rabbit hole they have burrowed their way into, the damage to traditional portfolios is likely to be considerable. This tightening of monetary policy is happening because inflation has returned – with a vengeance.
Ruffer round up – Q2 2022
July 2022: Investment Director Duncan MacInnes joins Rory McIvor for a review of the quarter, discussing the scale of wealth destruction across markets and how they see this rippling out into real world behaviour, and looking forward to what could be on the horizon and what that means for investors.
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Investment Review
July 2022: Jonathan Ruffer explains why wage demands are the final element required to fuel the new inflationary epoch. This regime will be good for social mobility in the long run, with the workforce and innovators as the winners. But it might well be brutal for the investment community.
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OUR THINKING
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France