Doyen investor predicts stocks ‘earthquake’ within months

One of Britain’s top fund managers, who correctly predicted the recent share sell off, has said that it was only a taster, and warned an “earthquake” will hit markets “within months”. Jonathan Ruffer, who oversees billions of pounds of savers’ cash and has a personal fortune of around £400m, was last year revealed to be the mysterious buyer of $200m (£141m) worth of insurance to protect his portfolio from a rise in the volatility of American shares.

When the US stock market began falling earlier this year, these contracts started to net Mr Ruffer substantial gains, cancelling out losses from other investments.

In his April quarterly review, Mr Ruffer has predicted that the recent volatility in share prices is just the beginning. “We are confident that the earthquake will happen, and more confident than we have been that it will happen in months, not years,” he said.

Mr Ruffer said that the main danger is a gap between how risky investors think their portfolios are, and how risky they actually are.

He also believes that the shift away from free trade and towards protectionism signalled by Brexit and Donald Trump’s election “is a headwind for stock markets” and will lead to increased inflation. flation.

He explained that t volatility in shares and nd bonds had, until February, bruary, been getting ever lower, and volatility “is how the majority y of the asset management industry judges risk”.

Due to this, Mr Ruffer said that investors “have come to believe the assets they own are safer than they actually are”. In his view, a conventional portfolio, a mix of bonds, shares and alternatives such as property has become more dangerous.

For shares, he said that “financial engineering” has increased the amount companies are borrowing.

Corporate bonds held in portfolios have increased “duration”, meaning they are more sensitive to interest rate rises, and investors are no longer rewarded with suitable returns from assets such as property to offset how difficult they are to sell.

“Volatility is not a guide to the risk of permanent capital loss; judged by risk of permanent capital lost, conventional portfolios are much riskier than they are measured to be,” he said.

Despite recent movements, the UK market is still calm versus its history, while the US market has returned to a level of volatility close to its historical average. This year so far, the FTSE 100 has experienced daily movements of more than 1pc on 14 occasions. But over the past 20 years, it has seen an annual average of 93 such movements. If Mr Ruffer is right, there is a variety of ways in which investors can protect themselves.

Mr Mould suggested that investors who pick their own stocks should focus on firms with strong balance sheets (meaning minimal debt), strong cash flow, and consistent earnings growth, “providing the shares trade on a reasonable valuation”.

Firms with weak balance sheets “should be trimmed”.

He also suggested that investors could increase the amount of cash they hold, buy precious metals such as gold, and invest in “short duration” bonds that are not as sensitive to interest rate rises.

Mr Ruffer said that inflationlinked bonds are one of the key assets he is investing in to protect his investors. For exposure to short duration bonds Mr Mould recommended the iShares UK Gilts 0-5 years exchange traded fund. It tracks an index of UK government bonds with a short time to maturity. It charges 0.2pc annually.

He also recommended the Artemis Strategic Bond (Quarterly) Income fund, which charges 0.57pc annually.

“This invests across a wide range of bonds, including government and corporate, and the managers change how they invest depending on their view of the economic cycle. It invests both in the UK and overseas, and yields 3.9pc,” he said.

For exposure to inflation-linked bonds, he suggested the Vanguard UK Inflation-Linked Gilt Index fund. It tracks an index of UK government index-linked bonds, and charges 0.15pc annually.

Jonathan Ruffer believes that investors think their assets are safer than they really are, reports James Connington, who gleans tips for protection ‘Conventional portfolios are much riskier than n they used to be’

The S&P 500 index of US shares has had 27 daily movements of more than 1pc in 2018, compared with an average of 75 per year over the past 20 years.

Russ Mould, of investment shop AJ Bell, which compiled the data, said: “The FTSE 100 and S&P 500 are still behaving relatively calmly compared with the past 20 years. Similar quiet periods in the past were followed by a real spike in volatility. We haven’t seen anything yet.”