A quick check of the Ruffer Investment Company website provides a convenient summary of its investment aims — namely to provide “consistent positive returns, regardless of how financial markets perform”.

It also goes on to claim that it tries not to lose investor’s money in any 12-month period. Its performance figures to date appear to bear that out. Over the past five years, Ruffer Investment Company has consistently shown a greater cumulative performance than the broader FTSE 250 index. Crucially it has managed that without the amount of volatility I often experience with other investments.

Given the prevailing economic climate, these objectives are particularly appealing to me, although I am conscious that I already hold Capital Gearing Trust in my portfolio, which operates along similar investing principles.

But investing conditions at present appear challenging to say the least. I do not know if we are facing a prolonged recession nor even a significant market correction. I do know from observation that market sentiment is lower than it has been for a while.

Therefore, adding more weight to my portfolio that prioritises capital preservation over capital gain seems prudent to me and am happy for my investments to reflect that.

Ruffer Investment Company is a multi-asset investment trust, which means that the fund managers can provide exposure to several asset classes that they believe meet the fund’s overall objectives. The bulk of these assets are inflation-linked government bonds, both in the US and the UK. This reflects a view that the managers have held for some time — correctly as it has turned out — that inflation will remain higher than the savings rate. Importantly these bond holdings are then hedged via credit default swaps to protect against potential default.

Similarly, derivatives are in place (via the options market) to provide insurance against falling share prices. These additional layers of financial protection again emphasise the focus on capital preservation.

The fund has exposure to the gold price (a 4.8% weighting) as well as other commodities. At present, this sector is under pressure due to both waning demand and a rising US dollar. However, I am comfortable with exposure to this asset class that could start to perform should inflation figures appear to plateau in the future.

Ruffer Investment Company may appear expensive, trading at a 12-month average premium of 2.82%. But this is not a stock that I would try and time an entry. I believe it has earned a place in my investment portfolio now.

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The price you pay for the stock market’s superior long-term rewards is dips and occasional crashes in the value of your investment. Indeed, as legendary investor Warren Buffett has said: “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”

If you can’t stomach this level of volatility, but are equally distressed by seeing the value of your cash savings gradually eroded over time by inflation, there are ways you can still grow your wealth effectively. With this in mind, I’d be happy to buy shares in Ruffer Investment Company (LSE: RICA) and Capital Gearing Trust (LSE: CGT) today.

These two investment trusts have similar objectives. Ruffer Investment aims “to achieve a positive total annual return, after all expenses, of at least twice the Bank of England Bank Rate.” Capital Gearing wants “to preserve shareholders’ real wealth and to achieve absolute total return over the medium-to-longer term.”

Protection

It hasn’t been a good year for the stock market so far. The table below shows the year-to-date performance of the FTSE 100 and the two investment trusts.

As you can see, both trusts have outperformed the Footsie, with Capital Gearing even managing to deliver a positive return. But what about when the stock market suffers a real meltdown?

Between 15/6/07 and 3/3/09 the FTSE 100 dropped a massive 47.8%. Over this same period, Ruffer actually gained 31% and Capital advanced 13.4%. However, the two trusts did experience declines ahead of and through the early part of the Footsie bear market. But these were relatively mild. Ruffer’s peak-to-trough decline was 14.7% (2/5/06 to 13/8/07) and Capital’s was 12.9% (28/12/06 to 31/10/08).

Furthermore, an investor holding both trusts would have seen only single-digit falls. During the period of Ruffer’s 14.7% decline, Capital dipped a mere 3.1%, giving an average fall of 8.9%. During the period of Capital’s 12.9% decline, Ruffer gained 8.4%, giving an average fall of just 2.3%.

Growth

The trusts have delivered excellent downside protection relative to the FTSE 100, but what of growth? The table below shows 10-year annualised total returns (capital growth plus dividends) for the index and the two trusts.

As you can see, Capital and Ruffer have delivered very decent returns (well ahead of inflation), but have lagged the return of the FTSE 100. Because they have one eye on protecting against downside risk, the trusts will never fully participate in the kind of equities bull run we’ve seen over the last 10 years. Currently, both have less than half their assets in equities. They have around a third in index-linked gilts and the remainder in cash, gold and various other assets.

Despite their similar objectives, Ruffer’s and Capital’s allocations to different asset classes, individual holdings within those classes and the performance of their share prices do differ to a greater or lesser degree at any one time. As such, I see merit in holding both trusts.

The post I’d buy these 2 investment trusts to PROTECT and grow my wealth appeared first on The Motley Fool UK.

On average, investment trusts tend to have lower management charges than open-ended funds, and historically, they have delivered better returns too.

Preserve capital

For novice investors looking for a defensive investment, then the Ruffer Investment Company (LSE: RICA) deserves a closer look.

The trust was set up in 1994 by Jonathan Ruffer, and is currently managed on a day to day basis by Steve Russell and Hamish Baillie. It aims to preserve capital in all market conditions, while delivering an investment return ahead of that from cash.

The fund does this by investing in a wide range of asset classes, which include equities, bonds, gold and currencies. It’s defensively positioned, with just 45% of its portfolio invested in equities and other growth holdings. The remainder of its assets is mostly invested in index-linked bonds, which protects it from rising inflation and recession risk.

Pricey valuations

To explain the fund’s defensive positioning, the managers say they are worried about pricey valuations in stock markets and technical stresses and skews in financial markets. As they reckon the risk of a sharp sell-off in asset markets remains high, the fund holds significant positions in a number of options and protective illiquid strategies, giving it additional downside protection against a major sell-off.

Although the fund tends to only outperform traditional equity funds during bear markets, overall returns haven’t been all that bad in recent years in spite of its defensive strategy. Over the past five years, the fund has delivered total net asset value (NAV) returns of 19%, earning it a return significantly greater than cash savings.

Higher returns

Meanwhile, RIT Capital Partners (LSE: RCP) may be a better buy for investors looking for higher returns. The investment trust, which is chaired by Lord Rothschild, is renowned for its strong long-term performance and its agile investment approach.

Although, on balance, RIT Capital Partners is still considered as a “risk-averse” fund, it is somewhat more aggressively positioned than the Ruffer fund. On the positive side of things, the fund has delivered superior returns to the Ruffer fund, with a total NAV gain of 61% over the past five years.

Diversified approach

In addition to an equity exposure averaging 44% over the past 12 months, it is also invested in private unquoted companies and absolute return and credit assets. This diversified approach, overlaid with its prudent currency positioning and macro exposure management, should help it to deliver an attractive combination of long-term growth and capital preservation.

Fund management charges are relatively low, with an ongoing charges ratio of 0.66%. Shares in the fund currently yield 1.7% and trade at a 2.4% premium to its last reported NAV.

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