Tuesday, April 27, 2021

Jonathan Ruffer: Quarterly Investment Review, April 2021

 One of the sharpest people in investment management.

First a reprise of December's "Izabella Kaminska: "2020: The year bitcoin went institutional"":

Bitcoin is on a tear. And this time, the hyper valuations might stick.

On December 11, a prominent but very private financial newsletter author noted to clients that while he had never previously written about bitcoin, it was correct to say that institutional capital had now started to arrive in scale and that it would be churlish to pick a fight with it. Demand for bitcoin would now outstrip supply. 

Bitcoin, he observed, would become an excellent metaphor for risk appetite in 2021 as a result. 

Less than a week later, Coindesk confirmed that UK-based asset manager Ruffer had accumulated some £550m of bitcoin since November, representing some 2.7 per cent of the firm’s AUM. Ruffer’s move is now being widely interpreted as the beginning of a major portfolio diversification trend into bitcoin. It seems institutional money can no longer afford to ignore it. And bitcoiners are understandably overjoyed....


On the day that was posted, December 18, bitcoin traded at $23,138.89 (4pm Eastern)
(it had begun the month of November 2020 at $13,803.69)

And our outro from her piece:

Jonathan Ruffer is justifiably famous for some high kurtosis (fat tail/black swan) VIX trades that ZeroHedge was tracking.

I like Ruffer's quarterly Investment Review but I have a serious problem when I read it.

I start to sing. This song:

"I like… fat… tails and I cannot lie, You vol sellers can’t deny..." 

From Ruffer LLP, April 12:

In lockdown, I have been watching the blockbuster Deutschland 89. There’s a moment in the hours before the fall of the Berlin Wall when the top-dog commissar considers whether to shoot himself – but a little piece of hemp consoles him with the thought that times of change are times of opportunity, times that bring up new winners.

I take it pretty much for granted that the forty year bull market is ending, and that it will be replaced by hard investment times. I am sure it will be a period dominated by what has come to be known as financial repression – a period when the post-tax returns from assets don’t keep pace with higher inflation. Savers will endure many years of enforced declines in the value of their wealth – in real (inflation-adjusted) terms.

It is through the eyes of the income owner I want to examine this phenomenon. Those who own assets outright can look at the ‘total return’ from their investments, indifferent to whether the money they spend (or accumulate) takes the form of income or capital. But not everyone is in the fortunate position of retaining flexibility in how they seek gains. For those with restrictions – such as the trustees of others’ assets – there is often a need to balance the competing interests of income today and capital tomorrow, regardless of which way the financial winds are blowing.

One strategy which has done well for total return has been the standard 60:40 ‘balanced’ portfolio. A 60% allocation to equities – believed always to be long-term winners – is offered protection in hard times by 40% in bonds (because in difficult conditions, bond yields come down and – crucially – the price of the bond goes up). It’s a great game, but only when inflation is falling. Ruffer’s early fortunes in the 1990s were made on this single insight – we went for 50:50, rather than 60:40 – matching War Loan (oh those days when government bonds told the truth about their past!) with a broad spread of equities. Back then, we had the field to ourselves, as few believed inflation could be comprehensively beaten.

A quarter century on, a bond yield may drop, in a matter of days or weeks, from, say, 0.5% to 0.25%. This sounds, in common sense, to be a drop from ‘very little’ to ‘very little indeed’ – but the arithmetic of the bond markets is mechanical, and that drop in yields moves the capital dial a fair bit. Yet this is arithmetic that works both ways. It makes today’s fixed interest security not a safe pairing for equities, but simply the opposite sort of danger. Now that inflation is about to go up, we enter a world in which bond and equity prices look poised to fall in tandem.

This review is the outcome of the struggle to understand the difference between income and capital, in a world where today’s true things may be fleeting, but where tomorrow’s true things will ineluctably become market truth....


If interested here is another of Ms. Kaminska's pieces on the change in bitcoin, this time dated February 19, 2021:
Seeing The Opportunity In The Financialization Of Bitcoin