Questor: Worried that the stock market is overvalued? This is the company for you

Richard Evans 27 October 2016 • 10:47am

Jonathan Ruffer still plays a role in managing the eponymous investment company Credit: aucklandcastle.org

The past seven years have been a wonderful time for stock market investors. If you were lucky enough to put money into the market when the FTSE 100 hit its post-financial-crisis low of 3,531 in March 2009 you would almost have doubled your money at yesterday’s close of 6,958 – and that’s before dividends.

Further gains, let alone on a similar scale, are hard to imagine. Much of the rise in share prices has been driven not by improving corporate profitability but by what traders call a “rerating”: investors placing a higher value on the flow of profits that a company is expected to generate.

That “rerating” has been driven by falling returns on other assets, principally cash and bonds. Those returns can more or less be mandated by central banks, so the bull market in shares can be attributed largely to their interventions. But central bank action appears to be nearing its limits.

The Bank of England Governor has indicated that he does not believe in negative interest rates, so the relative attraction of shares over cash can be said to have peaked.

Questor will continue to search for shares and investment trusts with the potential to grow even if the climate turns gloomy for the markets as a whole. But some investors may decide they would rather bank their gains from the past seven years and seek a safer place for savings.

The question for these people is: where do you put your money? Bonds are positively dangerous and cash pays little, while any return of inflation – thanks to the fall in the pound – will only make matters worse.

One option is the handful of investment trusts that focus on “wealth preservation”. Their primary goal is not to lose money. As a result they tend to hold a mix of assets including shares, bonds, cash, property and gold bullion.

There are three sizeable London-listed investment trusts that fit the bill: RIT Capital Partners, Personal Assets and Ruffer Investment Company.

All are overseen by experienced and credible managers and all have long records that broadly show an ability to limit losses when the stock market falls, combined, perhaps surprisingly, with an ability to keep up with or even outpace the market when it rises.

Ruffer is arguably the best in this respect. As the chart shows, it barely registered a blip during the financial crisis. (The chart shows how the fund’s net asset value has performed rather than its shares, as the NAV is a better reflection of the fund manager’s ability. However, the shares, which closed at 226p yesterday, have closely tracked the NAV – which was an estimated 227.8p yesterday.)

Despite this resilience, it has still outperformed the index since its launch in 2004.

The portfolio is strikingly different from your average stock market fund. About 45pc is in index-linked bonds and a further 16pc in Japanese shares, which represent the portfolio’s largest exposure to the stock market. British shares account for just 8pc, while gold and gold-related shares account for 7pc.

Overall, 83pc of assets are denominated in sterling, reflecting the dangers that currency swings pose to a conservatively positioned portfolio.

The managers, Hamish Baillie and Steve Russell, have strong views on the likely course of the world economy. In this they reflect the influence of Ruffer’s founder, Jonathan Ruffer, who still provides strategic guidance.

Mr Ruffer is certain that economies will not grow meaningfully until the world’s debt mountain has been dealt with, and that the only way in which this can happen is for central banks to stoke inflation. If and when this occurs, index-linked bonds will be about the only assets that can cope.

However, these bonds have appreciated hugely – some have gained about 60pc just this year – and could fall as precipitously if fears of inflation prove misplaced. The fund is not betting the farm on Mr Ruffer’s analysis, and the rest of the portfolio provides a buffer if it proves misplaced.

The trust’s track record suggests that it has a knack of holding the right mix of assets at the right time. Questor feels that it is about the safest around if you are nervous about the markets at current valuations.

The fee is a little on the high side at 1.18pc a year (the “ongoing charge”) but the performance in good times and bad justifies it. The trust is trading at a tiny discount of about 1pc. Although the current yield is about 1.5pc, the fund indicated recently it was likely to be cut to reflect the capital preservation goal.

Questor says: BUY

Ticker: RICA