RIT Capital Partners 19 June 2019

RIT Capital (RCP) has twin objectives: to generate long-term capital growth, and to protect shareholders’ capital. To this end, this self-managed trust invests in a broad range of asset classes and managers, each exhibiting differentiated returns. This, along with judicious management of risk (including currency) exposure, is how the trust aims to protect its investors in troubled economic environments.

RCP now has net assets of close to £3bn. Having gone through various stages of evolution, it now has a senior management team that allocates and invests the trust’s capital. Lord Rothschild, whose family owns 21% of the trust, has this year announced he will step down as chairman of the trust, marking the final step in his succession planning which has been progressing over many years.

The managers have four basic categories of investments: listed equities, private investments, absolute return and credit, and real assets. For a while now, the managers have been cautious on the outlook for equity markets, and so have been dialing back risk. As at the end of 2018, exposure to listed equities was 47% (the five-year range has been 35% - 70%). In reality the trust typically has a lower net exposure to equities, the difference being shorts (within hedge funds), any derivatives exposure and liquidity.

RCP has long been a proponent of investing in private, unlisted companies on a minority basis – which is now becoming much more popular in the closed-end fund space. As we discuss below, it is one of the “six cylinders” that the managers hope to drive performance through, and has increased as a proportion of the portfolio over the year from 22% to nearly 26%.

One of the distinctive features of the trust as an investment opportunity is the network of contacts that Lord Rothschild and the Executive Committee has developed over the years. This means that RCP can often obtain access to managers others can’t, either in closed funds or employing managers to run mandates solely on their behalf. Indeed, we understand that nine out of the team’s top ten current third-party managers are closed to new money.

The portfolio is currently cautiously positioned, which helped it deliver a small positive total return last year, when almost all asset classes delivered negative returns. Over five years, RCP has comfortably beaten its absolute performance target of RPI +3%. Against the MSCI AC World Index, the NAV has struggled to keep up. However, this has to be seen in the light of the lower exposure to equities of the trust and, indeed, its raison d'être – which is to protect wealth as much as grow it. The trust has delivered it’s performance with volatility of 5.6% over five years, relative to the benchmark volatility of 9.2%. Against peers in the flexible investment trust and open-ended peer groups, RCP has handsomely outperformed.

The trust has been trading on a premium to NAV since 2015. Demand for its shares has been strong during recent turbulent market and political conditions. The current high single digit premium (8% at the time of writing) reflects the current uncertain environment, and the attraction of a vehicle which aims to protect capital in difficult times, but grow capital in better times. It is worth noting that any sudden shock, either to RIT Capital itself, or global markets, could see this premium evaporate overnight, and thereby compound any NAV losses for shareholders.

RIT Capital is a unique trust, and it has a uniquely good track record of achieving it’s twin objectives – that of growing and protecting wealth. The past year, where nearly all asset classes fell in value, showed the strength of the trust’s approach, with a modest (but positive) total return.

The key driver for returns, and an increasing focus for the managers last year, was the private investments part of the portfolio. Here RCP’s network of contacts and relationships remains very important in generating ideas and opportunities, and is of course a key differentiator. Alongside Scottish Mortgage, RCP clearly has a lot to offer private companies looking for investment – having a very large balance sheet and (through the closed-end structure) the potential to have a long-term time frame.

Reflecting the uncertain times, and RCP’ s track record of protecting capital the premium has been driven to its current high single digit level. In absolute terms, we find it difficult to countenance ever paying a premium above 1 or 2%. However, the draw and attractions of RIT Capital clearly prove irresistible for many. We would countenance patience and look to invest at a more reasonable valuation. It is worth noting that any sudden shock, either to RIT Capital itself, or global markets, could see the current premium evaporate overnight, and thereby compound any NAV losses for shareholders.