- Ruffer LLP increased cash holdings to two-thirds of £22 billion.
- The firm deployed cash income into insurance instruments for potential Wall Street downturns.
- Ruffer maintains caution due to US interest-rate cut optimism.
Ruffer LLP, a UK-based investment firm, has moved to increase its cash holdings amid concerns over declining liquidity in the US markets. Ruffer’s fund manager, Matt Smith, revealed that
“Two-thirds of the roughly £22 billion ($27.6 billion) that the UK-based firm oversees now sits in cash, a record allocation.”
Smith further articulated that the income generated from this cash reserve is being strategically deployed into insurance instruments such as credit default swaps and US stock options. These instruments are structured to profit in the event of a substantial downturn on Wall Street.
The fund manager highlighted the potential for a market reversal within the next three months, coinciding with a reduction in liquidity from the Federal Reserve. However, he expressed concerns about the current volatility-selling environment, suggesting a possible shift in sentiment. Smith stated, “This huge volatility-selling ecosystem could go reflexively in the other direction.”
Bloomberg reported that Ruffer’s approach allows for concentrated bets, deviating from traditional industry standards. The firm successfully invested in Bitcoin in 2020, profiting over $1 billion from a $600 million investment. Nonetheless, it seeks to avoid a repeat of over 6% in its Total Return Fund in 2023. This loss came amidst the rallying global stock and bond markets.
Furthermore, Smith opined,
“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.”
Despite recent spikes in US inflation, which may dampen expectations for further monetary easing, Ruffer maintains a notably cautious stance compared to prevailing market sentiment.
The fund manager emphasized the importance of exercising prudence, similar to that which contributed to the firm’s 16% return to investors during the peak of the 2008 global financial crisis. He believes capital preservation takes precedence over cash returns, asserting, “We’re at a point in time where we think focusing on the former is the most important.”
However, timing remains important, as a sustained upward market trend may result in missed opportunities for Ruffer. Historically, the firm’s portfolios have delivered an average annual return of 8.1%, improving its cash rate by approximately 5% over the past three decades.
Ruffer’s strategic allocations include substantial holdings in long-dated UK inflation-linked bonds and investments in gold mining companies. Smith highlighted a shift in the inflation landscape, indicating, “We’ve had a regime change from a ceiling of 2% to a floor of 2% inflation.” According to the fund manager, “That means structurally, interest rates and inflation are headed higher.”
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