Ruffer trio: UK rate hike could be insufficient to keep inflation genie in the bottle

Hamish Baillie, co-manager of the Ruffer Investment Company

The managers of the £385m Ruffer Investment Company have committed to holding onto index-linked gilts as portfolio protection, despite recent price falls, as they fear interest rate hikes will fail to curb the rise of inflation in the UK.

The managers of the Ruffer trust, Hamish Baillie (pictured), Steve Russell and Duncan MacInnes, said they are holding index-linked bonds for protection against the inevitable rise in inflation, despite recent “noise” from the Bank of England temporarily hitting fixed income assets.

The trio believe any attempts by the Bank to raise interest rates to combat inflation will be ‘behind the curve’ and will fail to stop real interest rates from falling lower.

They said: “There are risks that a reversal of the emergency 0.25% cut, and a possible further rise next year, could prove insufficient to keep the inflation genie in the bottle, or be more than the UK economy can bear.

“Our assumption is for the former, interest rates rise a little, but as they do so, higher inflation actually shifts real interest rates lower.

“The latter outcome is possible, but we think this comes later as further rate rises are attempted in response to stubborn inflation.

“At this point it becomes clear there is little the authorities can do to stave off inflation and markets are likely to react accordingly.”

As a result, the managers are holding onto their allocation to index-linked bonds, which make up some 38% of the portfolio, despite the recent hit to fixed income assets from the Bank of England’s September “change of tack on interest rates”.

Last month, the Monetary Policy Committee hinted that “monetary policy could need to be tightened by a somewhat greater extent… than current market expectations”, causing the trio’s 2055 linker to fall some 10%.

However, they said: “Fortunately, we had prepared for this by holding UK interest rate options and rate sensitive equities (banks and cyclicals) to help offset any short-term pain.”

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The managers said the “noise” coming from the central bank had to be “guarded against”, but reiterated their belief that index-linkers were the “crown jewels” of the portfolio.

They said: “This lies behind our preoccupation with offsets to protect the portfolio. In the end, we see inflation on a rising path, with any interest rate rises both ‘behind the curve’ (so real interest rates do not rise), and eventually capped by what an indebted economy, addicted to low rates, can bear.

“At that point it will be clear that there is no brake on inflation and investors will suddenly, and urgently, see the need for protection. This is why we hold index-linked bonds.”

Over three years to 11 October, Ruffer has returned 22% against its AIC Flexible Investment sector average of 34%, according to FE. The trust currently stands at a 1.7% premium.

About the author

Jayna is senior reporter and investment trust correspondent at Investment Week. She joined the publication in August 2015 after graduating with an MA in Multimedia Journalism from the University of Kent.

Jayna holds the NCTJ diploma and has experience in print, online and broadcast journalism. She regularly contributes towards the Investment Week monthly podcast.

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