Ruffer Regulatory News (RICA)

5 October 2022

RUFFER INVESTMENT COMPANY LIMITED

(a closed-ended investment company incorporated in Guernsey with registration number 41996)

(the "Company")

Annual Report

The Company has today, in accordance with DTR 6.3.5, released its Annual Report for the year ended 30 June 2022 and a copy is attached.

http://www.rns-pdf.londonstockexchange.com/rns/7872B_1-2022-10-4.pdf

The Annual Report is also available via the Investment Manager's website at www.ruffer.co.uk/2022-ric-annual-report

A copy of the Annual Report has been submitted to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

Enquiries:

Sanne Fund Services (Guernsey) Limited

Company Secretary

Katrina Rowe

DDI: +44(0)1481 737673

Email: ric@sannegroup.com

Investec Bank plc

Broker

David Yovichic

DDI: +44(0)20 7597 4952

Email: David.yovichic@investec.co.uk

LEI 21380068AHZKY7MKNO47

1 Assumes reinvestment of dividends. See appendix for Alternative Performance Measures (APMs)

2 Dividends declared during the year

3 Annual dividend yield is calculated using share price at the year end and dividends declared during the year

4 See note 9

5 This is the NAV/NAV per share as per the Financial Statements. Refer to note 14 for a reconciliation between this figure and the NAV/NAV per share as reported to the LSE. See appendix for Alternative Performance Measures (APMs)

6 See appendix for Alternative Performance Measures (APMs)

Chairman's statement

The year to end-June 2022 has been another excellent year for Ruffer Investment Company Limited (RICL or 'the Company') in a challenging environment but one which has demonstrated the value of the Company's investment approach. The net asset value (NAV) total return over this period was 6.0%, the NAV per share rising from 281p to 295p. The share price total return was 5.6%, reflecting a modest fall in the premium of share price to NAV.

This performance was achieved despite substantial falls in financial markets in the second half of the Company's financial year, including a halving in the value of long-dated Index-Linked stocks between November 2021 and 30 June 2022. Index-Linked stocks have long been a significant percentage of the assets of RICL, so RICL's positive performance demonstrates the continuing effectiveness of the Investment Manager's active management of duration risk through offsetting derivative strategies.

Performance and share issuance increased the market capitalisation of the Company to nearly £1 billion, leading to entry in March 2022 to the FTSE 250 Index. This development reflects a broadening of the shareholder base and an improvement in the liquidity of RICL shares which, together with issuance at a premium being accretive to NAV, has been to the advantage of shareholders.

The compound annualised NAV total return to 30 June 2022 since the Company's launch in July 2004 was 7.7%.

RICL has continued to provide one of the highest returns per unit of risk of all the comparators. Relative to a risk-free investment (the Sharpe ratio), the return has been over twice that of the FTSE All-Share Index since the launch of RICL. In terms of the Sortino Ratio, which only measures the downside element of volatility, the Company has generated over three times more excess return per unit of risk than an investment in the UK stock market.

Earnings and Dividends

During the year the Company generated 3.67p per share of revenue and 8.16p per share of capital gain. The Company has always invested for total return which gives flexibility to the Investment Manager to pursue the optimal investment strategy for the long-term generation of return and the preservation of capital.

The Board is committed to retaining no more than 15% of the Company's income in any given year to allow the Company to remain able to be marketed to a UK retail client base. Having paid out an interim dividend in March 2022, amounting to 1.50p per share, the Company has declared a second interim dividend for this financial year of 1.25p per share. The remaining balance of revenue earned has been retained to add to the revenue reserve which may be used to help protect dividends against future fluctuations in revenue.

Diversification

RICL is one of a small number of London-listed closed-ended funds which aim for positive nominal or real returns rather than returns relative to a benchmark. Some of these 'absolute return' funds, including RICL, are classified as 'Protective' or 'Portfolio' Diversifiers. In the interim Chairman's statement in February 2022, I wrote that the Board remained confident that RICL would provide shareholders with a core diversifying component of their portfolios as well as protection of wealth.

Portfolio diversification is more than avoiding all eggs in one basket, which simply averages the risk that any one specific investment might go wrong. Such a policy can in fact lead to 'diworsification' - a term coined by the legendary fund manager Peter Lynch to describe assets moving together (positively correlated) which adds unnecessary risk to a portfolio without the benefit of higher returns.

It was Nobel Laureate Harry Markowitz who in the 1950s demonstrated that in markets where prices zig-zag over time, if one asset zigs while the other zags, yet each has exactly the same prospective total long term return, then combining the two assets in one portfolio can reduce portfolio risk without sacrificing expected return. Furthermore, of two portfolios which have exactly the same annual arithmetic return as each other, that which zig-zags less than the other (has lower volatility) will compound more wealth over time than the other.

The 'all-weather' RICL portfolio reflects the reality that more things can happen than will happen and, when the unexpected does happen, the Manager plans to have protected the portfolio by true diversification. Furthermore, what is true within the Company's portfolio is equally the case when shareholders combine their holding in RICL with other assets which comprise their overall wealth.

The Investment Manager demonstrated last year that the correlations of asset classes in the future may not reflect those of the past. How right they were. The classic 60/40 equity/bond portfolio has proved to be diworsification. The return on a 60/40 model portfolio was 17% negative in the second half of the Company's financial year to 30 June 2022, which compares to RICL's positive return of 2.9% over that same period.

After forty years of declining bond yields, it is easily forgotten that in the previous sixteen year period, from 1966 to 1981, a systematic rise in inflation, interest rates and bond yields meant that the best performing asset class over this period out of US bonds, equities and cash was not equities or bonds - it was cash.

Share issuance

During the year, the Company gradually issued a total of 118,284,348 shares, including an offering to both retail and institutional shareholders.

The reasons for seeking shareholder authority to issue shares were stated in the Circulars asking for shareholder authority as follows -

1 maintenance of the Company's ability to issue shares to meet ongoing demand in the market, in order to provide effective management of the premium to Net Asset Value per Share at which the shares may trade, so as to help to ensure that long-term investors who regularly acquire shares are not disadvantaged

2 an increase in the size of the Company, thereby spreading operating costs, other than management, administration and depositary fees, which are charged by reference to the Net Asset Value, over a larger capital base which should reduce the ongoing charges ratio

3 enhancement of the Net Asset Value per share of existing shares through share issuance at a premium to the last published Net Asset Value per share plus the costs of the issue and

4 improvement of liquidity in the market for the shares enabling easy purchase and sale providing shareholders with flexibility in the management of their own wealth without impacting the investment decisions of the Company.

Shareholders voted overwhelmingly in favour of Board authority to issue shares on a non-pre-emptive basis on five separate occasions during the financial year. This required five circulars and two prospectuses, and the authority given enabled the Board to contain the premium of share price to NAV to within 5% over the period.

The process by which the Company's Broker issues shares into the market to satisfy demand is known as 'tapping'. The tap issuance by the Company's Broker is controlled by the Board.

However, the rate of issuance necessary to contain the premium has averaged c. two million shares a week in financial year 2022 compared to an average weekly issuance of less than 500,000 shares over the 2021 financial year.

Apart from managing the premium, one benefit of the closed-ended structure of the Company and the gradualist approach to issuing shares is that it enables the Investment Manager to control the cash raised and to absorb it easily in to the RICL portfolio. Another is that this helps to avoid 'cash drag' - the impact of holding a quantity of uninvested nil-returning cash before it can be invested.

Responsible investing

Ruffer LLP (Ruffer) is a signatory to the six UN Principles for Responsible Investment (PRI), to Climate Action 100+, to the Transition Pathway Initiative and the Institutional Investors Group on Climate Change (IIGCC).

At the macro level, ESG considerations enable Ruffer to assess systemic risk across markets and asset classes, such as sovereign bonds and listed equities. This level of analysis includes

sector-specific trends or themes.

At the micro level, fundamental analysis of the securities RICL buys, sells and holds is embedded into the Ruffer ESG framework. The Responsible investment report in this Annual Report elaborates on RICL's approach to ESG policy and its implementation.

The portfolio has had no exposure to any sanctioned assets, in particular in relation to Russia.

Board matters

After the year-end, and following 20 years with the Ruffer Partnership, Hamish Baillie announced that he had decided to step down from the Partnership and as co-manager of RICL. Hamish has been a manager of RICL since 2011, when he took over responsibility for RICL from Jonathan Ruffer. Hamish has overseen the Company's excellent performance and growth over these years and, together with Duncan MacInnes as co-manager, developed a strong relationship between the Company and its shareholders, helped by other Ruffer communications such as webinars, Ruffer Radio and The Green Line. Hamish has left with the Board's admiration and gratitude for all that he has contributed.

Duncan MacInnes continues as manager and is supported by the same underlying investment team. We welcome Jasmine Yeo, who has been appointed co-investment manager with Duncan. Bertie Dannatt has taken on the operational aspects of Hamish's role which, as the Company and regulation have both grown, has become more time-demanding.

As I flagged in the interim report, Jill May and David Staples have decided to step down from the Board at the AGM in December 2022. We shall miss them. Both have made a significantly

pro-active and positive contribution to the Company as Directors and in their respective roles as Senior Independent Director and Chair of the Audit and Risk Committee. This has been particularly evident during a pandemic period which has seen a high level of Company activity that has demanded much of their time. We thank them for their contribution.

As I also mentioned in the interim report, Nicholas Pink and Shelagh Mason have agreed to take up the roles of Senior Independent Director and chair of the Management Engagement Committee respectively with effect from the AGM in December 2022.

In January 2022 the Board engaged OSA recruitment consultants to identify a Guernsey director to succeed David Staples as Chair of the Audit and Risk Committee. We are delighted that Susie Farnon became free to join RICL in this role after she retired in July 2022 as audit chair of

FTSE 250 HICL Infrastructure Ltd.

Following her retirement as Head of Audit for KPMG Channel Islands, Susie became a non- executive director and audit chair of a number of investment companies. She has been Vice- Chairman of the Guernsey Financial Services Commission and is a non-executive director of the Association of Investment Companies, the UK trade body. By joining the RICL board on

1 September 2022, Susie has been able to parallel run with David through the 2022 annual report preparation and audit process.

Having decided that five remains the appropriate number of non-executive directors, the Board engaged Longwater Partners in London in February to help identify a second new Director to succeed Jill May. Longwater provided a strong slate of candidates and we look forward to welcoming Solomon Soquar to the board in December when he will succeed Jill May on her retirement at the AGM.

Solomon holds a BA/MA in Politics, Philosophy and Economics and M.Phil in Economics from Balliol College, Oxford, where he studied and taught. He has had a long and deep practical experience of over 30 years across Investment Banking and Capital Markets with leading US and UK financial institutions. His particular focus has been in structuring risk management solutions for Wealth Management and his most recent executive role was as CEO of Barclays Investments Solutions Limited.

Solomon brings skills, experience and a perspective which are particularly relevant to the protection strategies that are a critical part of RICL's investment strategy. His knowledge and experience in this area is complementary to the other skills and experience on the Board.

In the interim report, I also mentioned that we had engaged a third party, Trust Associates, to evaluate Board remuneration, following last year's external Board evaluation. This was especially necessary given the prospect of finding two new directors and our recent experience that at least one potential candidate declined to continue discussion in the light of the level of directors' remuneration at the time. The outcome of this review is explained in detail in the Directors' Remuneration Report in this annual report.

Outlook

In the 'Economic Consequences of the Peace', Keynes commented: 'By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.' He went on to comment that the confiscation is arbitrary and strikes at the security and confidence in the equity of the existing distribution of wealth.

The current level of inflation is clearly no longer unobserved and was unanticipated, as the Bank of England forecast chart in the Investment Manager's report demonstrates all too clearly. Confidence in the equity of wealth distribution is fraying the edges of political concern. Like Hans Christian Andersen's Emperor, Central Banks are seen to have been short on clothes for the current economic and financial environment and have at last begun to tighten policy.

The Company's principal objective is to provide shareholders with a positive total net annual return of at least twice the Bank of England Base Rate. This objective has become more challenging. If it is true that markets are barometers rather than thermometers, reflecting how investors feel about the future rather than the present, then the financial weather outlook seems to be set fairer than might yet prove to be the case. The Board therefore endorses the Investment Manager's observation: 'There are times for a get rich quick portfolio and times for a stay rich portfolio. This is definitely the latter sort of time'.

Christopher Russell 4 October 2022

Strategic report

The Company carries on business as a closed-ended investment company. Its shares are traded on the Main Market of the London Stock Exchange (LSE) and it was admitted to the premium segment of the Official List of the UK Listing Authority on 20 December 2005. The Company is externally managed by Ruffer AIFM Limited, a UK investment manager authorised and regulated in the conduct of investment business in the United Kingdom by the Financial Conduct Authority (FCA). Ruffer AIFM Limited is also the Alternative Investment Fund Manager (AIFM) of the Company.

Board

The Board of Directors is responsible for the overall stewardship of the Company, including general management, structure, finance, corporate governance, marketing, risk management, compliance, gearing, contracts and performance. Biographical details of the Directors, all of whom are non-executive, are listed in the Management and Administration summary.  The Company has no executive directors or employees.

The Board has contractually delegated to external parties various functions as disclosed in the Corporate Governance Statement.

Investment objective

The principal objective of the Company is to achieve a positive total annual return, after all expenses, of at least twice the Bank of England Bank Rate.

The weighted average Bank of England rate throughout the year ended 30 June 2022 was 0.40% (2021: 0.10%).

The Company predominantly invests in internationally listed or quoted equities or equity related securities (including convertibles) or bonds which are issued by corporate issuers, supra-nationals or government organisations.

Investment strategy

The Company's strategy is to create a balanced portfolio of offsetting assets which in aggregate are intended to enable the Company to meet its investment objective. The aspiration remains to produce consistent positive returns, regardless of the performance of financial markets. Over shorter periods this is likely to result in the Company lagging sharply-rising equity markets, but outperforming falling equity markets. This strategy will be implemented predominantly through investments in listed securities, collective investment schemes and currencies but the Investment Manager has the flexibility to use other asset classes should it be necessary to do so.

The investment strategy has been tested in the last 12 months as conditions in markets have changed quickly, but the portfolio has stood up to this test. In order to achieve the Company's investment objective we need to be able to perform in both rising and falling asset markets. This means that we maintain a balance of investments with a small but potent book of cyclical equities to perform should economic and financial conditions improve, index-linked bonds and gold to benefit from sustained higher inflation and financial repression, and credit protection and options to protect the Company should there be a shock to financial markets.

Investment policy

In selecting investments, the Company adopts a stock picking approach and does not adopt any investment weightings by reference to any benchmark. Both the Board and the Investment Manager believe that the adoption of any index related investment style would inhibit the ability of the Company to deliver its objective.

The Company invests across a broad range of assets, geographies and sectors to achieve its objective. This allocation will change over time to reflect the risks and opportunities identified by the Investment Manager across global financial markets, with an underlying focus on capital preservation. The allocation of the portfolio between different asset classes will vary from time to time so as to enable the Company to achieve its objective. There are no restrictions on the geographical or sectoral exposure of the portfolio (except those restrictions noted below).

The universe of equity, equity related securities or bonds in which the Company may invest is wide and may include companies domiciled in, and bonds issued by entities based in, non-European countries, including countries that are classed as emerging or developing. This may result in a significant exposure to currencies other than pound sterling. Where appropriate, the Investment Manager will also use in-house funds to gain exposure to certain asset classes.

The Company may use derivatives, including (but not limited to) futures, options, swap agreements, structured products, warrants and forward currency contracts, for efficient portfolio management purposes only.

Investment restrictions and guidelines

It is not intended for the Company to have any structural gearing. The Company has the ability to borrow up to 30% of the NAV at any time for short term or temporary purposes, as may be necessary for settlement of transactions, to facilitate share redemption or to meet ongoing expenses.

The proportion of the portfolio invested into companies based in emerging or developing countries will be limited, at the time of any investment, to below 15% of the Company's gross assets.

The Directors have determined that the Company will not engage in currency hedging except where the Investment Manager considers such hedging to be in the interests of efficient portfolio management.

The Directors have determined that no more than 15% in aggregate of the Company's gross assets at the time of acquisition will be invested in listed investment companies (including investment trusts), with a maximum of 10% of gross assets invested in investment companies not having stated investment policies allowing them to invest no more than 15% of their own gross assets in other UK listed investment companies (including investment trusts).

General

In accordance with the requirements of the FCA, any material changes in the Investment Policies and Objectives of the Company may only be made with the approval of shareholders.

Investment of assets

At each quarterly Board meeting, the Board receives a detailed presentation from the Company's Investment Manager which includes a review of investment performance, recent portfolio activity and a market outlook. It also considers compliance with the investment policy and other investment restrictions during the reporting year. The Company's Top Ten holdings and Portfolio Statement are listed below.

Environmental policy

Whilst the Company has a limited carbon footprint in respect of its day to day activities, the Board notes that the Investment Manager recognises that environmental responsibility is core to its longer term business success, and actively integrates environmental, social and corporate governance (ESG) issues into its investment process. The Investment Manager's ESG policy is available upon request. For more detail, please see the Responsible investment report.

A number of environmental initiatives have been introduced by the Board and the Administrator, as follows -

- minimising printing of Board materials

- deemed consent from shareholders to accept electronic copies of documents

- use of recycled paper for Annual and Interim Reports for shareholders requiring hard copies

- use of recycled Woodland Trust printer paper by the Administrator, which funds new UK woodland and

- Fairtrade tea and coffee and tap water, rather than bottled water, served at all Board meetings.

In addition, the Board intends to carbon balance Directors' and Investment Manager's flights and is currently considering the merits of various carbon offsetting schemes.

Shareholder value

The Board reviews on an ongoing basis the performance of the Investment Manager and considers whether the investment strategy utilised is likely to achieve the Company's investment objective of realising a positive total annual return, after all expenses, of at least twice the return of the Bank of England Bank Rate. Having considered the portfolio performance and investment strategy, the Board has unanimously agreed that the interests of the shareholders as a whole are best served by the continuing appointment of the Investment Manager on the terms agreed.

Dividend policy

The Board's policy is to pay dividends semi-annually, which are typically declared in September and March, with an objective of retaining no more than 15% of the Company's income each year.

Dividends will only be paid from the Company's revenue account and not from capital. Dividend payments by the Company will depend on the net income stream generated by the underlying investments in the Company's investment portfolio and therefore no assurance can be given that dividends will continue to be paid.

The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by the Companies (Guernsey) Law, 2008, whereby the Board must be satisfied on reasonable grounds that the Company will, immediately after payment of any dividend, be able to pay its debts as they become due and that the value of the Company's assets would be greater than the value of its liabilities.

The Board has the discretion to increase or reduce the dividend, or not to declare a dividend, as appropriate in consideration of the financial position of the Company.

Details of the dividends paid during the year are set out in note 5 to the Financial Statements.

Principal risks and uncertainties and their management

The Board has undertaken a robust assessment of the principal risks facing the Company and has undertaken a detailed review of the effectiveness of the risk management and internal control systems. As stated within the Report of the Audit and Risk Committee, the Board, with the assistance of the Administrator and the Investment Manager, has drawn up a risk assessment matrix, which identifies the key risks to the Company, and which is reviewed and updated by the Audit and Risk Committee on a quarterly basis. The principal risks and uncertainties faced by the Company, and the mitigating factors adopted by the Company, are summarised below. The Board, together with the Investment Manager, regularly monitors relevant risks in relation to the ones mentioned below. During the year, these have included potential geopolitical and economic impacts, including those arising from the war in Ukraine, and current and potential interest rate rises and increases in inflation.

Investment risks - the Company is exposed to the risk that its portfolio fails to perform in line with the Company's objectives. The Board reviews reports from the Investment Manager at each quarterly Board meeting and at other times when expedient, paying particular attention to the diversification of the portfolio and to the performance and volatility of underlying investments.

Operational risks - the Company is exposed to the risks arising from any failure of systems and controls in the operations of its service providers, principally the Investment Manager or the Administrator. The Board receives reports annually from the Investment Manager and Administrator on their internal controls and reviews pricing reports covering the valuations of underlying investments at each quarterly Board meeting. The Board can and does receive explanations and assurances from its key suppliers as to their own operational resilience and plans and ability to respond during times of crisis.

Accounting, legal and regulatory risks - the Company is exposed to the risk of action or sanction by shareholders, counterparties or regulators if it fails to comply with the regulations of the UK Listing Authority or the Guernsey Financial Services Commission or if it fails to maintain accurate accounting records. The Administrator provides the Board with regular reports on changes in regulations and accounting requirements, including increased regulation relating to ESG and climate change.

Financial risks - the financial risks faced by the Company include market risk (comprising interest rate, foreign currency and price risk), credit risk and liquidity risk. These risks and the controls in place to mitigate them are reviewed at each quarterly Board meeting. Further details on financial risks are discussed in note 19 of the Financial Statements.

Emerging risks - the Board is constantly alert to the identification of any new or emerging risks through the monitoring of the Company's investment portfolio and by conducting regular reviews of the Company's risk assessment matrix. When an emerging risk is identified, the risk assessment matrix is updated and appropriate mitigating measures are agreed.

The Board seeks to mitigate and manage these risks through continual review, policy-setting, enforcement of contractual obligations and monitoring of the Company's investment portfolio. The Board, Investment Manager and the Company's Broker also regularly monitor the investment environment in order to identify any new or emerging risks.

Going concern

The Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Financial Statements since the assets of the Company consist mainly of cash and cash equivalents and securities which are readily realisable. The Directors also note that overall, due to the nature of the Company's portfolio, which - as discussed in more detail in the Performance section of the Chairman's Review and in the Investment Manager's report - comprises both equities and other more defensive assets, it has not been affected significantly in terms of value or cashflows by the effects of the covid-19 pandemic or the Russian invasion of Ukraine. Accordingly, in the Directors' opinion, the Company has adequate financial resources to continue in operational existence for the foreseeable future. Matters relating to the going concern basis are also discussed in the Long Term Viability Statement below and note 2(c).

Long term viability statement

The Directors have assessed the prospects of the Company over a longer period than the 12 months minimum required by the 'going concern' provision. For the purposes of this statement, having regard to the economic planning cycle and the Company's strategy review period, the Board has adopted a three year viability period.

In its assessment of the Company's viability over the three year period the Board has considered each of the Company's principal risks as detailed above and any emerging risks, and in particular the impact of a significant fall in the value of the Company's investment portfolio.

The Directors consider that a 30% fall in the value of the Company's portfolio would be significant but would have little impact on the Company's ability to continue in operation over the next three years. In reaching this conclusion, the Directors considered the Company's expenditure projections, the fact that the Company currently has no borrowing, but has the ability to borrow up to 30% of its NAV and that the Company's investments comprise predominantly readily realisable

securities which can be expected to be sold to meet funding requirements if necessary, assuming market liquidity continues.

Also, the Board has assumed that the regulatory and fiscal regimes under which the Company operates will continue in broadly the same form during the viability period. The Board speaks with its Broker and legal advisers on a regular basis to understand issues impacting on the Company's regulatory and fiscal structure. The Administrator also monitors changes to regulations and advises the Board as necessary. The Board also has access to the Administrator's compliance resources as well as the compliance department of the AIFM.

Based on the Company's processes for monitoring operating costs, share discount, internal controls, the Investment Manager's performance in relation to the investment objective, the portfolio risk profile, liquidity risk and the robust assessment of the principal risks and uncertainties facing the Company, the Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period.

Key performance indicators

The Board uses a number of performance measures to assess the Company's success in meeting its objectives. The key performance indicators are disclosed in detail below.

Investment Manager's report

For the year to 30 June 2022 the Company had a share price total return of 5.6% and the NAV total return of 6.0%. The Company has achieved its objective of preserving and growing shareholder capital.

The annualised NAV total return since inception of the Company in 2004 is 7.7%, which is ahead of UK equities with a much lower level of volatility and drawdowns.

The period has been unusually challenging for investors. The remarkable thing about Q1 2022 is that the best-case non-cash scenario was a loss of 4.5% offered by US high yield bonds. History shows how rare it is that there was nowhere to hide. However, this wasn't an anomaly - the second quarter was worse. The 60/40 portfolio is down 17% so far in 2022, a clear indicator that balanced, multi-asset portfolios are struggling.

Given all that has happened year to date, we have presented contributions for the full year to 30 June 2022 and also for the six months to 30 June 2022.

Performance contributions for six months to 30 June 2022

With nowhere to hide in conventional assets, it is no surprise that it was the portfolio's unconventional protective assets that drove performance in the first six months of calendar year 2022. Option protection via the Ruffer Protection Strategies Fund added 4.4%, driven mostly by

interest rate options and equity puts. Credit protection continued to be an essential hedge contributing 3.6% via the Ruffer Illiquid Multi-Strategies Fund.

Within equities, energy stocks were the strongest contributors, adding 2.0% to performance. Individual stock performance of note came from value cyclicals - for instance Chesapeake Energy (+31%) and Mitsubishi UFJ Finance (+19%). The decision to rotate into defence and healthcare stocks was also rewarded as Northrop Grumman (+29%) and Bristol Myers Squibb (+27%) performed well.

Towards the end of the period, as fears of recession grew, exposure to the auto manufacturing sector was hit hard with Volkswagen (-25%) and General Motors (-45%) together costing the portfolio -0.5%. In the UK, exposure to domestic value stocks via Ruffer UK Mid & Smaller Companies Fund (-14%) was hurt by the political omnishambles, inflation and recession risk, detracting -0.4% from the portfolio. Both cases provided a stark reminder that cheap stocks can get cheaper in the short term.

The carnage in the long-dated inflation-linked bond market should not be understated. These assets cost the portfolio -6.0%. The 2073 index-linked bond was down as much as 54% from its November 2021 all-time high - further commentary below.

Performance contributions for 12 months to 30 June 2022

The drivers of performance over 12 months were similar to those that shaped the first half of 2022. The toolkit of unconventional protections performed exactly as desired. Options added 3.7% and Ruffer Illiquid Multi-Strategies Fund added 3.3%. These protections provided both negative correlation and duration at a time of market stress and high cross-asset correlation in conventional markets.

Energy equities added 2.8% to performance and we took significant profits during the period. In the summer of 2021, we had a 7% allocation to these stocks at the end of the period this was closer to 4%.

Gold exposure and gold equities cost the portfolio 0.9% during the period. The largest individual pain came from Kinross Gold (-0.4%), which was impacted by the Russian invasion of Ukraine. Gold is a prime example of the failure of conventional safe havens in recent times. Despite inflation and war being front page news, gold has misfired. We still think it has a valuable role to play, but this greater correlation with risk assets is a consequence of gold's increased financialisation.

In the period, inflation-linked bonds cost the portfolio 3.5%, with the longest dated 2073 issue down 51%. We have long called these assets the 'crown jewels' in our portfolio due to our conviction that they should provide the perfect protection in the world of financial repression we are entering. We are still of this view. But the sensitivity to rising rates we have warned about, has now been felt. This illustrates a distinction we have been labouring; investing for inflation and investing for inflation volatility are not the same thing and conflating the two will be costly.

Mr Market will make us crawl through fire for the gift of redemption, and derivative protection via the unconventional toolkit remains essential to safely navigating choppy and dangerous markets. Inflation-linked bonds are now back to pre-Brexit prices - and yet in our assessment the likelihood and proximity of the inflationary denouement is much greater.

Portfolio changes

In the last few months of the period, we reduced the risk in the portfolio, moving into what we call 'crouch mode' for what we believe will be a particularly dangerous period in the second half of this year. This de-risking included

1 Reducing equities to a 25% weighting with relevant hedges on top for good measure - this is the lowest weighting for Ruffer portfolios since 2003.

2 Increasing portfolio duration as the rise in bond yields has increased its potential effectiveness as a hedge

3 Rotating gold exposure from equities to bullion.

Investment outlook

Summary

1 The long term - an era of inflation volatility

2 The short term - the impossible tightrope walk

3 The bear is mid-grizzle

4 Hard hats on

There's an old Charlie Munger quote: 'If you're not a little confused about what's going on, you don't understand it'.

That sums up the fog of war, literal and metaphorical, we find the global economy immersed in. We have never had higher conviction on the long term - that we have moved into a new regime of inflation volatility and those conventional portfolios are not going to fare well. In the short term - the outlook is far murkier and path-dependent as policymakers try to navigate a narrow path without either tipping the economy into a wage-price spiral or over the other side into recession. In the meantime, liquidity continues to drain from the system.

The long term - an era of inflation volatility

So what does the new regime look like? We think we return to spasmodic bouts of inflation volatility like we saw after the World War 2 period or indeed again in the 1970s. The long-term chart of UK and US inflation makes it clear that the last 30-40 years has been something of an aberration.

We expect an extended period of accelerating financial repression - where interest rates are below the rate of inflation, forcing negative real returns upon savers. 'Stealing money from old people, slowly' as Russell Napier has memorably described it. We believe we are evolving into a staccato, stop-start world of higher inflation and faster economic growth. This will be driven by targeted government stimulus to tackle the big societal issues of the day; inequality, climate change and now the containment of the geopolitical aspirations of China and Russia.

'Ketchup inflation'

With these trends will come much greater economic and market volatility - the great moderation of inflation, growth and geopolitics enjoyed over the last 40 years is over. Having spent a decade trying in vain to create inflation, like an impatient child slapping on a ketchup bottle, central bankers have now got too much, all at once, in an uncontrolled splat. Inflation was desired as a palliative treatment for the system, the least painful method of debt default and wealth redistribution from old to young and rich to poor - but this ketchup inflation is too hot to handle. The political imperative is that something must be done.

The short term - the impossible tightrope walk

Given that some inflation is desirable but too much is political suicide, perhaps the critical question is: how hard will central bankers fight inflation?

Monetary tightening is a little like going on a diet; easy to talk about and make detailed plans for, but difficult when it comes to the reality of the hard choices and abstinence.

From the current starting point of inflation at 40-year highs in both Europe and the US and a surging, fizzing jobs market - there are no good choices. Central bankers resemble quivering funambulists facing an impossible tightrope walk as they try to meet their objectives - full employment alongside low and stable inflation. Complicating matters further they have politicians breathing down their necks as inflation has spurred a cost of living crisis which now dominates the headlines. On one side, tighten conditions too much and unemployment will surge, probably tipping the economy into recession and crushing asset markets. On the other side, do not tighten enough and risk inflation getting embedded into wages, beginning the dreaded wage-price spiral of previous inflationary episodes.

To make an impossible situation worse the tightrope walker appears a little short-sighted. In May 2021 the Bank of England thought inflation in summer 2022 would be around 2.5%. The actual result? 9.2%.

So, we must conclude that nobody has a clue - particularly not academic economists. Despite their recent mistakes they remain highly confident that inflation will drop back to around 2% by 2024 and stay there.

By June 2022, central bankers began the gradual process of rate rises in the UK and US. Indeed the Federal Reserve (Fed) is engaging in the multi-variate experiment of simultaneous rate hikes and quantitative tightening.

We are now starting to see what happens when more than a decade of easy money is removed from the system. As ex-Federal Reserve Governor Jeremy Stein said, 'the thing about monetary policy is that it gets in all the cracks'. There is no hiding from the reality of higher interest rates. Every tightening cycle throughout history has ended with a recession, a market crisis or both. 'The Fed hikes until something breaks' as the old adage goes.

The punchbowl is being taken away. Quantitative easing is melting away and quantitative tightening is beginning. Combined with rapid-fire rate hikes, it's a recipe for financial market sobriety.

It IS different this time

The policy reaction function has changed. For the last decade or so, downside risk was limited because investors knew that once equity markets declined 20% the Fed put would kick in and there would be policy easing. Today, given the need to dampen demand to tame inflation, the market upside is capped; rise too much and it will be met with more hikes and tighter financial conditions. The Fed wants higher risk premiums, and that means a lower market.

If it were to come, another Fed U-turn, similar to 2018's Powell Pivot or last November's abandoning the word "transitory", would be confirmation central bankers have lost control and America has entered an era of structurally high inflation.

The Bezzle

The economist John Kenneth Galbraith coined the idea of 'The Bezzle', a form of psychic wealth that can be created by mistake or self-delusion. The theory goes that if a collector has a Picasso painting (or should it be an NFT these days?) worth US$10 million and someone steals it, there is a period of time, potentially years, where both the collector and the thief believe they have a US$10 million asset and act accordingly. The effective wealth in their micro economy is US$20 million. Half of the wealth that exists in this moment is illusory and will be destroyed only when the collector identifies the crime. Today's bezzle is the trillions of dollars of assets held in crypto, profitless technology and venture capital funds globally. Although these sectors have felt significant pain already, we believe there is potentially much more to come as opacity, illiquidity and discretion around asset pricing allows the bezzle to be revealed slowly rather than with a bang.

The bear is only mid grizzle

How does an asset fall 95% in value? First it falls by 90% and then it halves!

Investors under the age of 60 have been conditioned to buy the dip. Central bank easing has always been just around the corner and the market recoveries are swift and steep. A look further back in history shows that the pattern many bear markets take is a steep drop, followed by a more prolonged, grind lower over a number of years. In these scenarios, buying the first downward lurch leaves your capital almost as impaired as buying at the top. Let me explain why we have high conviction that the bear market is not over, and stocks are not (yet) a buying opportunity.

The Fed is tightening into an economic slowdown.

Valuations have come down to something more reasonable but are based on earnings estimates that remain too optimistic, still forecasting growth when flat would be a good result.