Before he became one of London’s most admired fund managers, Jonathan Ruffer had, by his own account, two spectacularly unsuccessful spells as a barrister. Not long into our interview, I gain a clue as to why this seemingly harsh self-assessment might be true. We’re discussing the credit crunch, which he predicted well before it hit, and policymakers’ responses to it. Ruffer is explaining where the Japanese went wrong 20 years ago when their economy first showed signs of slumping into debt deflation, from which it has still fully to recover. ‘So what you’re saying they should have done is …’ I prompt, not certain that readers would follow Ruffer’s meaning to this point. ‘Borrowed more money. Devalued the currency,’ he replies. ‘The point is… um… there was about to be a brilliant point, Jonathan, and it’s gone.’ ‘I interrupted you,’ I apologise. ‘No, not at all. But write down “brilliant point… to be confirmed later!”’ Which I do, though not before wondering how this approach might have played before a po-faced High Court judge.
Fortunately, Ruffer has little reason to fret about his previous profession. Since setting up his own investment firm in 1994, he has not only made money for himself, which many other fund managers have also done, but been remarkably successful in not losing his clients’ money, a rarer phenomenon. The last decade has been unusually hazardous for investors, and many hitherto illustrious reputations have been shown to be undeserved. Yet, almost alone amongst his peers, there has been virtually no single 12-month period in the last decade when Ruffer’s clients have lost money. While shares returned nothing and markets yoyo-ed violently, his funds and client portfolios compounded at 12 per cent per annum, with low volatility. His firm now handles around £8 billion of institutional and ‘Old Rectory’ money, spread across a range of absolute-return funds and discretionary portfolios.
Although he confesses to a degree of arrogance, the amiable Ruffer is some way removed from the desiccated calculating machines who call the shots in many hedge funds. His track record should not be misinterpreted, he says. Although so-called ‘absolute return’ funds — claiming to make money for investors whichever way markets move — have been popular in recent years, the idea is a nonsense because ‘If I say to you, “We’re trying very hard not to lose any money”, then by definition what I’m saying is “I’m trying very hard to be riskless”. But if I’m also saying we’re trying to make, say, 10 per cent a year, by definition what I’m saying is that we’re putting risk into the portfolio. That opens up the question, “Well, which is it? Are you taking risk or aren’t you taking risk? You can’t be doing both.”’
Dishonest aspirations are nothing new in a sector where marketing imperatives routinely take precedence over substance. It was, says Ruffer, one reason why he started his own firm. ‘I have a crusading spirit about private-client fund management, which I think is done really badly. Our business was set up in reaction against the way the industry works… Of the two flags I put up the flagpole, one was trying to surround myself with people who are mad keen on investment. The point of investment is to take on the markets. Investment management attracts a lot of people who are kind to labradors and all the rest of it, but actually comparatively few of them really want to take the markets on.’ Most firms go out of their way not to deviate far from the consensus, but Ruffer wanted to create an environment in which smart graduates would be challenged to do just that.
‘The other thing was that I simply couldn’t see the point of investing and charging a fee for doing so when you were losing money for people.’ In practice, as Keynes observed, most professional investors prefer to fail by conventional means than succeed by unconventional ones. Private clients are generally loth to change advisers, provided they are doing no worse than average, so the business risk of making a commitment to absolute returns requires a good deal more courage.
Behind Ruffer’s success, he believes, lies a willingness to make a few big ‘macro’ calls and stick with them even when at first they appear to look foolish, and in constructing portfolios that reflect those calls: putting some risk on the table, but overlaying it with defensive or uncorrelated assets that can withstand multiple bad outcomes, and acknowledging that the timing of macro events can never be predicted with accur-acy. The credit crunch was a showcase for the technique at work.
Ruffer and his team had been warning clients that financial disaster lay ahead for at least two years. The defensive positioning of his funds, which made positive returns in 2006–07 but underperformed some rivals while the credit bubble inflated, was not vindicated until the Lehman collapse led to global meltdown. Ruffer made a double-digit return in 2008 while his competitors lost 25 to 30 per cent of clients’ money, or more.
And now? Ruffer believes the defining condition of the current investment scene is monetary instability, as the world teeters between the twin threats of deflation induced by excessive debt, and renewed inflation arising from the unprecedented monetary stimulus policymakers used to try to forestall the first threat. The endgame, in his view, is going to be high inflation, with interest rates well below inflation. In other words, just as in the 1970s, virtuous savers will once again be required to pick up the bill for the excesses of the past. ‘That’s as strikingly obvious as the credit crunch, but the difficulty is knowing when it’s going to happen.’
It could be years, therefore, before monetary stability returns. Portfolios need to be calibrated accordingly. Conventional strategies won’t do the trick, he argues. Most things that look safe, like cash and conventional government bonds, are anything but. One bet Ruffer has been making is buying Japanese financial stocks, which he believes could soar if Japan continues its recent half-hearted attempt to drive down the yen. Apart from that, his clients’ money is mainly concentrated in large-cap equities with strong yields, index-linked gilts and gold. ‘The secret,’ he says, ‘is not just making the big calls — I have probably only made four or five since the firm began that have really made a difference — but having the courage to stick with them when everyone else thinks you’re crazy. We’re determined not to try to be clever in what we do. Long observation shows that clever fund managers lose their clients’ money rather more quickly than stupid ones!’
A fuller version of this interview can be found at www.independent-investor.com.