William Heathcoat Amory
View profile
Updated 01 Aug 2023
Save Article Download

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by RIT Capital Partners. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

  • Over the six months to 30/06/2023, RIT Capital Partners’ (RCP) NAV per share total return (including dividends) was broadly unchanged at -0.2%. This compares to the MSCI ACWI (50% £) which was up 11.0% and CPI plus 3% at 5.5%. The S&P 500 delivered double digit returns over the same period, and the NASDAQ had one of its strongest gains in a decade, up almost a third. A ‘tech is everything’ narrative, buoyed by optimism around artificial intelligence, saw a robust recovery for a relatively narrow range of stocks. Excluding a handful of the largest technology companies, the remaining stocks in the S&P 500 averaged more modest returns. The FTSE 250 (of which RCP shares are a constituent) declined by nearly 1%.
  • RCP’s in-house management team (J Rothschild Capital Management) maintained a relatively low quoted equity exposure over the period. They also deliberately had little exposure to publicly listed technology stocks, given this sector is well-represented in the private investment portfolio. Despite this, the quoted equity portfolio performed well, helped by some strong stock picks, as well as healthcare and Japan exposures. Private investments were down slightly for the half year, overall supported by a number of transactions at or above previous carrying values. The largest detractor over the six months was currency, driven in large part by Sterling’s 5.1% appreciation against RCP’s US dollar-denominated assets. Elsewhere, the uncorrelated strategies portfolio was additive, with credit and interest rate positions as well as gold, all in positive territory.
  • Over the six months, the discount to NAV at which RCP shares trade widened by 10 percentage points to 21%. The board have discussed this situation at length, and have a two-pronged approach. Firstly, they have deployed a material amount of capital in share buybacks, to lock in the accretive benefit for shareholders, improve liquidity and help reduce the discount volatility. Over the six-month period, RCP bought back 5.6 million shares at a cost of £105m. Secondly, the board are enhancing RCP’s communications efforts to provide a more frequent and more detailed flow of information on the portfolio and its performance.
  • A total dividend for 2023 of 38 pence per share has been declared, an increase of almost 3% from 2022. RCP’s dividend yields c. 2% at the current share price. Gearing remained broadly static over the period, finishing at 6.8% of NAV. The manager reports that they are holding healthy levels of liquidity, believing these are fertile markets for deploying long-term capital, in particular in US mid-cap stocks, and European credit.
  • Chairman of the board Sir James Leigh-Pemberton said, “the complicated backdrop is providing an exceptionally fertile environment for our Manager, JRCM, to identify opportunities in both quoted equity and credit markets which should, we believe, offer healthy double-digit returns with a meaningful margin of safety… I am delighted that Nick Khuu has been promoted to Co-CIO. Nick is a very experienced investor who has been instrumental in the management of both our quoted equities and uncorrelated strategies”

Kepler View

Context is everything. So whilst RIT Capital Partners' (RCP) NAV performance over the first half of 2023 may have lagged rising equity markets (and is perhaps part of the reason why the discount to NAV has widened), it is worth remembering that RCP has been cautiously positioned with respect to equity markets, both by having a relatively low net equity exposure, and within this by having a relatively defensive underlying equity exposure.

The low exposure to quoted technology businesses (which have led equity markets) is a result of the manager’s conscious decision to gain exposure to their digital transition theme within private markets. RCP’s managers highlight that stripping out the few megacap technology stocks from the S&P 500, the remaining stocks averaged a return of around 6% over the six months to 30/06/2023. By comparison the quoted equity book rose by almost 7% in the first half, an entirely acceptable performance. Private investment valuations tend to lag, and so if bullish sentiment on technology remains a feature, we may potentially see this filter through to RCP’s NAV via further realisations and upside potential in the private investments book.

RCP aims to deliver long-term capital growth, while preserving shareholders’ capital. Historically, RCP’s NAV has participated in 74% of market upside, but only 41% of market declines since inception. It achieves this through diversification across a broad spread of asset types, as well as active risk management by the in-house management team, which aims to shield the portfolio from specific risks. That said, there can be times when parts of the portfolio are not performing. As the graph below shows, private investments make up the largest individual segment of the portfolio. It is this section of the portfolio that powered the strong performance of the trust relative to equity markets during 2020 and 2021, but contributed to negative returns during 2022, and has marginally detracted so far in 2023. A consequence of the strong organic performance is that private investments now represent c. 40% of NAV, a figure we would expect to trend downwards over time as the portfolio naturally rebalances. Sentiment on the relatively high exposure to the private portfolio is likely a contributor to RCP’s discount widening (we note that listed private equity trusts currently trade at historically wide levels in discount terms). Despite relatively muted activity within the private portfolio, during the half year the manager notes the robustness of valuations in this part of the portfolio, evidenced by three disposals over the period at or above carrying values. The managers note that the majority of their private investments are profitable, or have enough cash to enable a runway of more than a year without further fundraising. As we highlight above, if parts of the private portfolio were sold at attractive premiums to valuations, this may have a dual impact of driving NAV returns but also, as the proportion invested in private assets declines, potentially act as a catalyst for the discount to narrow.

The board have shown themselves willing to actively address the discount, with a significant amount of highly accretive share buybacks having taken place. The managers do not yet see grounds for increasing their overall exposure to equity markets, but continue to focus on specific themes, such as healthcare, digital transition and Japan. We welcome the promotion of Nick Khuu as co-CIO, which illustrates the strength and depth of the talent on the investment team. RCP is set up for, and has historically dealt well with, challenging periods for equity markets such as the period we currently face. The board report that they are confident that the in-house management team will continue to find attractive opportunities to invest RCP’s capital, but also see the current discount as a compelling investment for shareholders, as is evidenced by continuing buybacks.

Login to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.