Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Bitcoin: the nonsensical asset that makes sense for now
When a 25-year-old English fund manager with £21 billion (A$37 billion) under management discloses it had made a sizable investment in bitcoin, it is bound to give the institutionalisation of the crypto currency a big kickalong.
This is especially so when the manager regards bitcoin as a potential store of wealth and not an alternative to a day at the races. Ruffer LLP, a privately held partnership, is now making its all-weather style of investing widely available in Australia through the launch of an unlisted unit trust, to be distributed by third-party marketer Shed Enterprises.
The trust has been seeded by an Australian investor client of Context Capital, a Perth-based consulting business launched by Chris West, former CIO of WA Super, which merged with Aware Super last year. West, the principal, has been joined at Context Capital by consultant Chris McAlpine and operations manager Mark Foo, both also from WA Super.
Jonathan Ruffer, founder and chairman, wrote to clients early this month, following its December announcement of a £550 million ($A970 million) investment in bitcoin that the best of a “smattering” of responses was a two-worder – ‘Happy Christmas’.
“That seems about right for an initial investment equivalent to around 2.5 per cent of the portfolio,” he said. “Our underlying reasoning is that bitcoin is becoming a challenger to gold’s standing as the one supra-currency, the thing to own when fiat currencies are kerplunked. We have done much work on assessing the danger that bitcoin is a wrong’un. We have been watching it for a longish time, and our judgement is that it is a unique beast as an emerging store of value, blending some of the benefits of technology and gold. Yes, it is a seemingly non-sensical asset – but one that makes absolute sense for how we see the world.
“The question that followed was: ‘when to make the move?’ A journey from pirate to president is a continuum, but an investment is a binary event – you either make it, or you don’t. We took the view that last November was not too soon, and if we left it any longer, subsequent price performance might make it feel too late. So, we made an allocation. At the time of writing, the entry price looks to have been favourable, but that’s not really the point. We are in the business of keeping clients safe, and we are nervously satisfied that bitcoin has a small part to play in the pudding.”
Ruffer sees its overriding goal is to “deliver consistent positive returns, whatever happens in the financial markets”. The firm says: “Our pre-occupation is with not losing money, rather than charging headlong for growth. It’s by putting safety first that we have made good money for our clients. Through boom and bust. For nearly 25 years. If we keep doing our job well, we will protect our clients’ capital – and increase its real value substantially.”
It is mostly described as a contrarian investor, but the firm says that this is not completely true. It is undoubtedly a long-term one though. At a client webinar last week (January 13) investment directors Alex Lennard and Duncan MacInnes pointed out that the bitcoin holding was still less than the allocation to gold, which has been a staple of the Ruffer style as a store of wealth and anti-inflation cushion.
Duncan MacInnes said that the firm has set itself up in preparation for a likely surge in inflation. “Credit protections (such as credit default swaps and alternatives) are a key uncorrelated protection for us going forward,” he said. “We also have cyclical equities, which are geared into the economic recovery that will benefit from the market’s broadening to value stocks… [US] Inflation only has to rise to 2.5 per cent for bonds and stocks to be positively correlated. I think most investment managers are unprepared for this.”
Alex Lennard said: “Coronavirus was the only thing that mattered in 2020.” Investors’ response to the volatility had the hallmark of an inwardly focused industry, mostly interested in relative returns, he said. “Much of that we have been talking about for the past 12 months is starting to play out. We are strongly of the view that investors should be prepared for a regime change in markets which is now well underway.”
Perpetual is the RE for the trust and Mainstream the administrator and custodian (with core custody contracted to one of the major custodian banks).
