“I thought you chaps at Ruffer said that you’d never lose money for me – what’s gone wrong?”
The weakness in markets reflects the passing of an inflexion point of mood: from a sensation that we’ve been living through extremely benign investment conditions, and that now we have moved into a much harsher environment. We have been arguing that the new climate will see a market setback punctuated by a trinity of mischiefs: the broadness of the setback, the speed of the fall, and the extent of the decline. If this proves to be accurate, it will represent some of the most challenging conditions for a generation. In broad terms, our strategy has been – and still is – to have a limited exposure to equity risk, and to combine this with powerful protections. These barely protect at all against limited falls, but will build into a powerful carapace when gales become storms. It is hard to protect risk assets from ordinary setbacks – everybody knows these can happen routinely, and protection against them is prohibitively expensive. Our central belief is that there lies ahead of us market conditions which are capable of causing permanent damage to people’s wealth, and our absolute preoccupation is to prepare for this, while continuing to accept that the timing is uncertain. It would be reasonable for investors to feel that the events of December give credence to our view that bad things are, indeed, on the way, while at the same time they might question whether we have a handle on navigating it. This review, and the accompanying report by our Chief Investment Officer, Henry Maxey, are to provide reassurance on the navigation.
The two reports – this one and Henry’s – are designed to be complementary. His report is an analysis of the pressures on the market – it is technical, going into the plumbing of the system. I highlight it because it brings together a wide range of disparate threads to create a cogent single narrative. I will therefore use this review to concentrate on what we are doing in the portfolio; the key to why we are doing it is set out in Henry’s piece.