The managers of the Ruffer investment trust called 2018 a 'disappointing and frustrating' year in terms of returns, but are confident the protective investments they have in place will serve them well in 2019.
In a monthly investor report for December, managers Hamish Baillie, Steve Russell and Duncan MacInnes revealed they had cut their equity allocation in 2018 to its lowest level since 2008, to sit at just 34%.
This was down from 42% and was comprised of 10.5% in UK, 10.4% in Japan, 9.3% in North America, 2.9% in Europe and 1.5% in Asia ex Japan.
However, the managers said, this failed to prevent the trust from sustaining "damage" - the NAV total return of the vehicle stands at -6% for the year, according to the report.
"We have failed in the last 12 months to deliver on Ruffer's raison d'être: namely to protect capital and deliver positive returns regardless of the direction of markets," the managers said.
"That is disappointing and frustrating to us; more importantly it has been costly to our shareholders."
The trio said they have focused the equity portion of the portfolio on cyclical businesses trading on low valuations, believing these would capture the benefits of economic growth, but this "did not soften the blow as these stocks fell in line with equity markets".
However, they believe the stocks in the portfolio are "well-placed to capture any bounce" in the global equity backdrop.
Looking at 2019, the managers are predicting credit markets will be "at the epicentre of the next crisis", but expect the effects to be felt throughout the financial markets.
To combat this, the managers of the £382m trust have chosen to make "protective investments" to shield the vehicle from material declines, rather than buying expensive protection "against bumps in the road".
Choosing this option, they said, was now starting to have a positive effect on the portfolio.
They said: "The protective investments have only just begun to kick in, the exception being our investments against distress in credit markets: these have performed well (up around 30% over the quarter) and we would expect them to continue to deliver strong positive returns should the stresses we observe begin to manifest themselves more seriously."
The trio added they believe this combination of option protection and credit market protection will be "powerful" and will "more than offset" the losses from the equity exposure.
"When combined with gold starting to show signs of life and index-linked bonds likely to contribute positively, this should allow us to be greedy when others are fearful, if markets fall further," they said.