Before he became a rich and admired preserver of investors’ capital, Jonathan Ruffer had, by his own account, two unsuccessful spells as a barrister. It is not long into our interview that I gain a clue as to why this seemingly harsh self-assessment might be true. We have been discussing the credit crunch, which he publicly predicted was on its way well before it hit – the Queen and others mystified by why nobody saw it coming was clearly not a client – and how governments and policymakers should best respond to it.
Ruffer has been explaining where the Japanese had gone wrong 20 years ago when their economy first showed signs of slumping into debt deflation, a malaise from which they have still fully to recover. “The mistake they made after 1990” he pronounces “was not to reflate in a way that compromised the currency. They did everything right, but their behaviour was middle-class bad behaviour, a case of running round the room with the scissors open. If they had done just that little bit more, and behaved a little more badly, so that they compromised the yen, then they would have got out of the bind, just as Britain did in the 1970s. They just stopped short of doing enough to be effective. What they saw as a ceiling should have been the starting gate”.
“So what you are saying they should have done is…” I prompt, not entirely certain that every Spectator reader will have followed Ruffer’s meaning to this point. “Borrowed more money. Devalued the currency” he replies. “The point is the…em…the…point. There was about to be a brilliant point, Jonathan, and it’s gone”. “I interrupted you”, I reply, apologetically. “No, not at all. But write down “brilliant point”. Pause. “To be confirmed later!” Which I do, though not before wondering how this splendid rhetorical approach might have played before a po-faced member of the High Court bench.
Mr Ruffer fortunately has little reason to spend time fretting about his past professional career. Since setting up his own investment firm in the 1990s, he has not only made a lot of his money for himself, which many other fund managers have also done, but been remarkably successful too in avoiding losing his clients their money, an altogether rarer phenomenon. The last decade, it is worth remembering, has been an unusually hazardous one for investors. The stock market is still lower today than it was in 2000. Millions incurred hefty losses in the global financial crisis. Many hitherto illustrious professional reputations have been shown to be undeserved.
Yet, almost alone amongst his peer group, there has been virtually no single twelve-month period in the last decade when clients of Ruffer’s firm have lost money. In a decade when shares returned nothing, and markets have yo-yoed violently from one extreme to another, his funds and client portfolios have compounded at 11.5% per annum with low volatility. His two main funds have trebled in value since 2000. It is the nearest any professional investor in the UK has come to delivering the Holy Grail of investment, a seemingly risk-free return. As his reputation has spread, so too has Ruffer Investment Management’s business. It now handles around £8 billion for clients, both institutional and “Old Rectory” money, spread across a range of absolute return funds and discretionary portfolios.
Although he freely confesses to a degree of arrogance, the amiable founder of the firm is some way removed from the dessicated or buttoned down calculating machines you will find calling the shots in many hedge funds. His impressive track record should not be misinterpreted, he says. Although so-called “absolute return” funds have been popular in the last few years, with their claims to make money for investors, whichever way the markets move, it is an absurd aspiration. “The idea of absolute return is a nonsense” he says. “It’s a push-me, pull-you, because if I say to you, “Oh, we’re trying very, hard not to lose any money,” then by definition what I’m saying is “I’m trying very, very hard to be riskless”. But if I’m also saying what we’re trying to do every year is to make, say, 10% a year, by definition what I’m saying to you is that we’re putting risk into the portfolio. So if you’re saying I’m both doing something and doing the opposite of it, it 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 the investment business, where marketing imperatives routinely take precedence over substance. It was, says Ruffer, one reason why he started his business. “I have a crusading spirit about private client fund management, which I think is done really, really badly. The way to understand our business is that it was set up in reaction against the way that the industry works. It has a certain amount of anger to it”. When the scandal-beset Lloyd’s of London insurance market blew up, he says, it took out “the only group of professionals who were even less impressive at fund management” than traditional private client investment firms.
“Of the two flags I put up the flagpole, one was trying to surround myself with people who are mad keen on investment. Montgomery said the real point of being a soldier is to close with the enemy and kill them. Now, it seems to me that there’s an exact parallel with people going into the investment world today. The point of investment is to take on the markets. Because it sounds such a good profession, and we all pay ourselves well, the milk rounds at university are popular. But investment management attracts a lot of people who are lovely people, kind to Labradors and all the rest of it, but actually comparatively few of them really want to take the markets on”. While most firms go out of their way not to deviate too far from the consensus, he wanted to create a working environment in which smart graduates would be challenged and inspired to take on just that task.
“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. It seems to me it’s perfectly acceptable for a fund manager to lose money, but only as long as they realise that it’s because they are having a bad patch”. In practice, as Keynes first observed years ago, most professional investors prefer to fail by conventional means than succeed by unconventional ones. Private clients are generally loth to change advisers, provided the latter 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 in a world full or risk to make a few big “macro” calls and stick with them even when at first they appear to look foolish. The art then lies in constructing portfolios that reflect those calls: putting some risk on the table, but overlaying that with defensive or uncorrelated assets that can withstand multiple bad outcomes, and acknowledging that the timing of big macro events can never be predicted with precision. The credit crunch was a showcase for the technique at work.
In April 2007 Ruffer’s right hand man, Henry Maxey, laid out in a detailed report the reasons why the subprime crisis, when combined with the myopia of policymakers, would lead inevitably to financial disaster. Ruffer himself had been giving the same warning to his clients for at least two years. The defensive positioning of his funds, which made positive returns in 2006-07, but underperformed many peers while the credit bubble inflated, was not vindicated until the Lehman Brothers collapse led to global financial meltdown. Ruffer made a double digit return in 2008 while most private client firms lost 25%-30% or more of clients’ money.
And where do we stand now? Ruffer believes that the defining condition of the current investment scene is monetary instability, as the world teeters back and forth between the twin threats of deflation, induced by excessive debt, and renewed inflationary pressures, arising from the unprecedented monetary stimulus policymakers are committing to try and forestall the first threat. The end game, in his view, is “absolutely obvious. It’s going to be high inflation, with interest rates well below the rate of inflation”. In other words, with their wealth eroding in real terms, virtuous savers will once again be required to pick up the bill for the excesses of the past decade, just as they did in the 1970s. “That (outcome) is as strikingly and simply obvious as the credit crunch, but the difficulty is when that is going to happen, and the fact that, between now and then, we might well be looking at teetering over the deflationary edge”.
It could be years, therefore, before monetary stability returns. Investor portfolios need to be calibrated to cope with this uncertain outlook. Conventional strategies won’t do the trick, he argues. Most things that look safe, like cash and conventional government bonds, are anything but. One risk bet which Ruffer has been making is buying Japanese financial stocks, which he believes could soar if the Japanese continue their recent half-hearted attempt to drive down the value of the yen. In a world where nearly all governments are openly competing to devalue their currencies, he thinks the pound is vulnerable. Apart from that, the clients’ money is mainly concentrated in the equities of large capitalisation 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 are crazy, which is most of the time. We are 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!”
You can read a full transcript of my interview with Mr Ruffer by following the Ruffer Interview link on the left hand side of the Navigation menu.