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.
‘Genuine heretics’: how ‘safety first’ pays off for Ruffer
The firm was founded by Jonathan Ruffer on the principle that “investors like making money, but they hate losing money more.” Ruffer is built to preserve capital for the long-term: centred on “absolute-return investing with a focus on downside protection.”
It’s a philosophy that the firm’s investment director, Alex Lennard, who joined Ruffer in 2006 after graduating from Exeter University with an honours degree in economics and finance, finds highly congenial.
“My family has a very long history of blowing themselves up ; over-extension and losing everything is a sort of a Lennard family trait,” he says. “So, for me – trying to fight my family background – the idea of capital preservation has always resonated particularly strongly. Personally, I don’t particularly like taking on a lot of personal debt. I like the idea of putting capital preservation first, and then, if you look after the downside, seeing what you can do on the return side.”
This flows into an investment strategy that has two simple objectives: firstly, not to lose money in any 12-month rolling period and secondly, to achieve positive returns in all market conditions. Ruffer’s aim is to build an “all-weather” portfolio of assets that will enable it to deliver on its objectives, regardless of what is happening in the markets or the economy.
That appealed to Lennard immediately when he arrived at Ruffer. But how the strategy is applied day-to-day was even more interesting. “From a philosophical standpoint, the thing that ensures you want to stay at Ruffer is that the intellectual challenge is massive. We are quite an academic organization, where people are encouraged to challenge, to debate, and to have views,” he says.
“My academic background is pretty conventional – I did economics, but at Ruffer, rather than being surrounded by lots of other people with economics degrees, we’ve got historians, we’ve people with modern languages backgrounds, we’ve got philosophers. We very firmly believe that that’s how you get different ways of thinking, and that’s something that makes the process more effective, and more interesting. The idea of having people that can think differently, and are prepared to express those differences of opinion, is something that we’ve always looked to do,” Lennard says.
“Right from the outset, with Jonathan, Ruffer has always enjoyed having younger people, and genuine heretics, around the table, because that’s when you actually get some pretty good debates. Otherwise you just get people who all think the same way, which is pointless.”
In fact, Lennard thinks intellectual diversity will only grow in importance. “We think the world is heading into a new regime, and the fact is that everyone who’s got a Masters in Finance has learned everything they know from the last 40 years. So, however many finance degrees you’ve got, it’s not going to necessarily help you.”
In a firm built on intellectual debate, Lennard says competitiveness is also valued – and the ability to lose gracefully. “Henry (Maxey), our CIO, says he wants people who are willing to be brave, in terms of both their thought processes and their implementation of it. That means, effectively, the licence to make mistakes, which is really the only way you learn.
“That is tempered by the fact that we are always looking for assets that offer asymmetric return profiles, combining them to build a portfolio that will make relentless progress over the long term. The way that we think about portfolios enables you to make mistakes, because you’re always looking at offsets; so, even if you’re making a mistake, you should hopefully have something else on the other side of the portfolio, that’s allowing that mistake to be offset.”
Away from work, Lennard and his teacher wife Emma have two children under the age of six, which he says supplies all he could want in terms of work-life balance. “Time away from work tends to be very family-focused. Neither my wife nor I bring work home – although obviously, we have had to over the last two years – and weekends are very full-on with the children.
“In former times, I played football a lot (he is a Manchester United fan, having been beguiled by Eric Cantona), but I find that with children the ages of mine, I say ‘used to’ quite a lot. I used to play a lot of tennis, I used to ski a lot, and I used to play football. When I have time, I still play football, and I do sneak to the gym whenever I can. I suppose I might be able to get back to skiing and tennis in time,” he laughs.
