Fund manager Ruffer has not taken any further profits on bitcoin after its latest price surge, driven by news that a growing a number of blue chip companies from Tesla to Mastercard are adopting the digital currency.
Bitcoin smashed through $50,000 today for the first time ever, increasing Ruffer’s profits on its original investment to around 233%.
The famously conservative asset manager ploughed 2.5% of its assets, equivalent to $600m (£432m) into a bitcoin bet in November, when it was priced around $15,000, ahead of its recent surge.
Ruffer locked in some of the explosive gains made, through December and January, effectively cashing out its original stake to leave its then c$700m profits invested.
After falling back to around $39,000, Bitcoin has gone on to rally by more than 25%, initially driven by Elon Musk’s Tesla disclosing it had bought $1.5bn of Bitcoin and would begin accepting it as a form of payment soon. News that Mastercard, Bank of America and BNY Mellon are to embrace cyptocurrencies, while Morgan Stanley has said it is looking at trading them for clients, has further brought the asset class closer to the mainstream.
Speaking ahead of bitcoin surpassing $50k today, Ruffer fund manager Alex Chartres told Citywire’s Funds Insider the firm is still continuing to let the position run for now, although the team is watching its movements closely.
‘The short answer is we’re never going to let it get to a large part of the portfolio, whereby the volatility of the asset swings the portfolio around,’ he said.
‘Clearly, we are alive to price movements and we’re an active manager. But since we’re trying to deliver through-cycle low volatility returns whatever the weather, you can imagine that we’re not going to allow anything to get so large that it starts adding volatility.’
Though the firm said a month ago that it believes bitcoin was at the ‘foothills’ of a long trend of institutional take-up, at that point Ruffer remained one of the few City names to take the plunge.
Chartes (pictured), a portfolio manager of the £3.5bn capital preservation-focused Total Return
‘The speed of the build-out of the institutional architecture around cryptocurrency has been blistering, even in the time that we have had exposure to bitcoin,’ he said.
‘That’s a key part of the thesis. Not only that investors will increasingly desire life rafts in a sea of money printing and potentially assets that provide diversification in a world where most assets are highly correlated, but also that more and more managers will see bitcoin and digital hard assets as part of that solution.’
Chartres described Tesla’s buy as another ‘marker’ that bitcoin was going mainstream.
The digital currency is currently a little under a 3% position in the Total Return fund, according to the manager. He reiterated arguments that it would act a tool against ‘financial repression’ in a world where interest rates remain low and inflation will be allowed to run much higher to erode debt.
However, Chartres said that it would remain a small part of their portfolio, diversifying the hedging bucket which makes up around 40%, including gold and inflation-protected bonds.
Inflation versus repression
Expectations of rising prices have dogged markets recently. But for Chartres and his colleagues on the portfolio, Steve Russell and Matt Smith, inflation is one part of the wider issue of what policymakers will have to do to drive down debt. From the massive spending required to combat coronavirus to the reversal of the disinflationary forces of globalisation, that story only gained impetus last year.
‘We’ve had financial repression for the last decade and we think it’s going to get worse,’ said Chartres.
About a tenth of the portfolio is in UK index-linked gilts and a fifth in other index-linked bonds whose value and coupons rise in line with inflation. Chartres said they took some profits in this area as it recovered last year, but it remains the ‘absolute bedrock’ of the portfolio, given their outlook.
They also banked some gains on gold and gold equities, together about 9% of the portfolio, partly to fund the bitcoin buy. However, Chartres said that precious metal is ‘highly likely’ to be a ‘must-have asset’ this year, continuing to act as a store of value compared to paper currencies.
Those protective assets, as well as a range of derivatives and other hedging instruments, steered the Ruffer fund to strong performance last year, especially during the crash. The fund was up 12.1% over 2020 versus the FTSE All-Share’s 9.8% fall, according to fund factsheets.
The £504m Ruffer Investment Company (RICA), the closed-end sister strategy managed by Hamish Baillie and Duncan MacInnes, was also a robust performer. The similarly positioned portfolio generated a 13.5% underlying return last year, with shareholders enjoying a slightly better 17.9% total return as the shares moved from trading at a small discount towards a premium valuation.
UK equities ‘to fly’
Chartres also expressed excitement about the growth assets in the portfolio. The just over 40% held in equities is heavily tilted towards out-of-favour ‘value’ stocks and ‘cyclical’ business, which are very much tied to the fortunes of the wider economy and will be helped by any recovery in the latter half of 2021.
In particular, the UK is a dominant weighting at nearly 15% the portfolio. The managers believe the domestic market’s ‘double discount’ due to the political turmoil the UK has faced combined with the predominance of unloved sectors like banks, energy and retail have created attractive opportunities.
‘If we do get a strong economic rebound and growth is more broadly-based, then the sorts of things that are listed in UK markets look like they’re going to fly,’ said Chartres.
There is a heavy representation of UK lenders including Lloyd (LLOY), Barclays (BARC) and NatWest Group (NWG) in the top 10 holdings. Chartres said they were well-positioned to profit if the yield curve steepens as economies reopen – borrowing money at lower short-term rates and lending to their customer at higher long-term rates.
Japan is another region they like, making up about 8% of investments, where corporate earnings are highly-geared to global growth and the market is cheap. They have been playing themes like increased spending on digitisation, via IT services companies NEC and Fujitec.
The fund delivered a 44% return over the five years to 15 February. That compares to a 45% gain for the FTSE All-Share, which is an imperfect comparator given the fund’s absolute return mandate. Shareholders in the Ruffer Investment Company enjoyed a 45% total return over the same period.