Vantage: Ruffer’s Steve Russell explains how markets are still transitioning to a new regime of higher rates

Edison’s Vantage series returns with a new season, starting with an interview with Steve Russell, investment director at Ruffer Investment Company. Ruffer is a UK-based institutional fund manager that manages c £26bn of assets. Steve traces his journey to Ruffer and provides a glimpse of what it is like to work at Ruffer. Steve believes we are in a transition from a monetary dominated, low interest rate, low inflation environment to a fiscal regime dominated by a higher inflation, higher interest rate environment. His view is that inflation is not transitory and will persist.

Steve expects inflation to remain above target, interest rates to remain high and a more challenging period for financial assets. The transition between these regimes is going to be difficult and the market in his view is struggling to comprehend what is happening, still clinging on to the view of growth stocks as the place to be invested. He is extremely cautious on equities, with Ruffer’s current 15% weighting being at a historical low. Steve is concerned that there may be further valuation downside, citing the example of profitable tech in the United States, which he believes is still overvalued, and that there is a liquidity event still to come for the equities market.

Ruffer tries to balance its portfolio between ‘fear’ assets and ‘greed’ assets. Usually equities are the ‘greed’ asset, but in the current macro environment Ruffer believes that, following the significant sell off in long-duration assets, long-dated UK index-linked bonds are best positioned to deliver returns and fit the ‘greed’ bucket. The bearish view on equities might turn if there is a change in stance from central banks on inflation or if there is a capitulation event in equities. Ruffer does not intend to invest in the poster children of the last decade (the FAANGs). Instead Ruffer believes that the future winners will be value stocks with high free cash flows, and also, as a consequence of deglobalisation, companies with high invested capex that can improve their environmental footprint. Examples of stocks that Ruffer likes on its top-down view are UPM Kymmene (UPM.HEL) and Bayer (BAYGN.DE). Ruffer also buys stocks where it is convinced by the investment thesis, which may intersect with its investment views. As examples, Steve runs through Ocado (OCDO.L), Games Workshop (GAW.L) and American Express Company (AXP.N).