(Bloomberg) — Ruffer LLP, the £22 billion ($27.6 billion) UK-based asset manager, is making its biggest-ever bet on cash as shrinking US liquidity boosts the possibility of a violent market reversal.
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Two-thirds of the money it oversees now sits in cash, a record allocation, according to fund manager Matt Smith. The income from that stash is being funneled into insurance policies in the form of credit default swaps and US stock options that will profit in the event of a big decline for Wall Street.
“It could be within the next three months, which is a time when Fed liquidity is going to be coming out,” said Smith. “This huge volatility-selling ecosystem could go reflexively in the other direction.”
Ruffer’s discretionary operation means it can lump all its money into one or two concentrated bets, rather than simply hugging industry benchmarks. While that included a successful wager on bitcoin in 2020, Ruffer will be keen to avoid a repeat of the more than 6% loss for its Total Return Fund in 2023 as global stocks soared and bond markets rallied.
Excessive optimism over US interest-rate cuts has left markets priced close to perfection, fueling Black Monday-style liquidity risks as the US central bank continues to wind down its bond-buying program, Smith said. Even as the latest hot US inflation print dims the outlook for US easing, Ruffer’s view is still among the most bearish in the market.
Black Monday refers to the sudden and severe stock market crash of Oct. 19 1987, which remains the worst daily percentage loss for the S&P 500 and Dow Jones Industrial Average on record. While its causes are debated, the lead-up to the plunge was characterized by a frothy bull market in risk assets, which Smith said he sees parallels to today.
Time for Caution
The time is right for the kind of caution that helped Ruffer return 16% to investors at the height of the global financial crisis in 2008, according to Smith.
“We have two investment objectives: One is capital preservation, and the second is to deliver a better return than cash, but it is a secondary objective,” he said in an interview. “We’re at a point in time where we think focusing on the former is the most important.”
To be sure, it’s a question of timing. The longer markets remain buoyant, the more Ruffer could miss out. The firm’s typical portfolio has produced an average return of 8.1% a year since inception, while Ruffer’s cash rate has averaged about 5% over its three-decade history.
Ruffer’s largest investments also include long-dated UK inflation-linked bonds and gold miners.
“We’ve had a regime change from a ceiling of 2% to a floor of 2% inflation,” Smith said. “That means structurally interest rates and inflation are headed higher.”
(Adds context on Black Monday in sixth paragraph.)
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