RIT Capital Partners: Protecting The Downside

RIT Capital Partners (RCP) is one of the largest investment trusts in the UK. At the time of writing, it was the fourth biggest, with a market value of £3.2bn. It’s only outgunned size wise by 3i (£8.7bn), Scottish Mortgage (£7.5bn) and Foreign & Colonial (£3.7bn).

It’s chaired by Lord Rothschild, who is now 82 years old, and his family retains an 18.3% stake in the company. Ron Tabbouche is the Chief Investment Officer; he joined the company from GAM in 2012 and took over from Micky Breuer-Weil.

I currently own this investment trust and have done so since 1996, making it the longest held investment in my portfolio. So, it seemed an obvious choice for my first blog post!

It was one of a number of investment trusts that I initially bought through a savings scheme. I invested the princely sum of £50 per month at first, adding to it with the occasional lump sum. A few years ago, the management of the savings scheme was transferred to Hargreaves Lansdown, although I am not sure if it still accepts new subscriptions.

RIT Capital Partners is a relatively young investment trust, only having been in existence for 30 years. It was preceded by the Rothschild Investment Trust, which was set up in 1971. After a series of acquisitions, the Rothschild Investment Trust no longer qualified as an investment trust, so in 1988 it was split into two, creating the listed wealth management firm St. James’s Place Capital and RIT Capital Partners.

Investing style

RIT Capital Partners is a truly global fund and invests in a wide range of assets, but it has a strong focus on capital preservation.

Its AIC sector is Flexible Investment, so it’s lumped alongside other investment trusts such as Hansa (HAN) and Personal Assets (PNL).

The chairman’s statement from its 2017 annual report has this useful summary:

… your Company’s net quoted equity exposure averaged around 44%, including significant investments in technology in the USA and Asia. This was complemented by approximately 22% in private investments, 25% in absolute return and credit, and 7% in real assets, including gold.

Here’s a fuller breakdown from RIT Capital Partners’ latest annual report — you should be able to click on the images to enlarge them if needed.

A lot less direct

Hopefully, this gives you an idea of the wide range of different investments you get with RIT Capital Partners.

It only really has 3 direct quoted investments of any size, being CSX Corporation, Trian Partners and Automatic Data Processing. The vast bulk of its portfolio consists of long-only equity funds, hedge and absolute return funds, and private equity funds.

As to what is actually in these funds, well your guess is as good as mine. There isn’t a great deal of explanatory detail in the report and accounts, so I’d class this trust as very much a ‘black box’ investment.

It hasn’t always been this way. If you look at an annual report from a decade or so ago, you’d find direct quoted investments made up some 60% of its portfolio, with long-only equity funds and hedge funds making up less than 20%. The RIT Capital Partners of today is quite a different beast.

Another change from a decade ago is that it’s now using a bit of borrowing to juice returns a little. The latest gearing ratio was quoted as 13%, with borrowings of £426m and cash of £123m at the last balance sheet date.

RIT Capital Partners’ track record

RIT Capital Partners’ website has a decent amount of information, but perhaps most useful is this summary of its track record since it set up shop in 1988:

As at	Net assets (£m)	Net assets per share (p)	Share price (p)	Premium/ (discount) %	Dividend per share (p)
Dec 17	2,858	1,839	1,962	6.7	32.0
Dec 16	2,692	1,730	1,855	9.0	31.0
Dec 15	2,441	1,573	1,681	6.9	30.0
Dec 14	2,300	1,483	1,397	(5.8)	29.4
Dec 13	2,146	1,384	1,260	(8.9)	28.0
Dec 12	1,847	1,191	1,131	(5.1)	28.0
Mar 12	1,920	1,249	1,220	(2.3)	4.0
Mar 11	1,984	1,289	1,307	1.4	4.0
Mar 10	1,815	1,180	1,082	(8.3)	4.0
Mar 09	1,350	874	831	(5.0)	7.5
Mar 08	1,690	1,092	1,147	5.1	4.0
Mar 07	1,636	1,047	1,000	(4.5)	3.1
Mar 06	1,535	983	1,020	3.8	3.1
Mar 05	1,113	713	694	(2.6)	3.1
Mar 04	981	628	578	(8.1)	3.1
Mar 03	675	430	372	(13.6)	3.1
Mar 02	758	483	425	(12.2)	3.1
Mar 01	760	484	437	(9.9)	3.1
Mar 00	811	509	439	(13.8)	3.1
Mar 99	760	399	341	(14.5)	2.2
Mar 98	738	384	327	(14.9)	2.0
Mar 97	586	304	242	(20.1)	1.82
Mar 96	561	283	223	(21.3)	1.65
Mar 95	450	213	174	(18.5)	1.58
Mar 94	469	222	171	(22.8)	1.51
Mar 93	386	181	117	(35.4)	1.15
Mar 92	306	141	85	(39.4)	1.15
Mar 91	318	132	92	(30.1)	2.44
Mar 90	334	131	97	(26.0)	2.64
Mar 89	344	134	114	(15.1)	1.65
Aug 88	281	106	81.5	(23.0)	n/a

Beating bear markets

That’s a lot of data, but I think it helps illustrate a number of points. For example, RIT Capital Partners often highlights a variation of this statistic:

Since your Company’s listing in 1988, we have participated in 75% of the market upside but only 39% of the market declines. This has resulted in our NAV per share total return compounding at 11.4% per annum, a meaningful outperformance of global equity markets. Over the same period the total return to shareholders was 12.6% per annum.

Exactly how these upside/downside figures are calculated isn’t specified, but the implication is fairly clear. When the market is rising, expect the its share price to lag the index a bit. When it’s falling, expect it to fall, but by significantly less.

Up steadily but down in a rush

Now, in general, stock markets tend to go up a lot more than they go down. They tend to rise slowly for extended periods, as they have done since 2009 for example. But when they fall, they fall sharply — such as they did in 2008.

RIT Capital Partners’ net asset value per share fell by 20% from March 2008 to March 2009, so that was quite a bit less than the FTSE 100 as it dropped by 40% over the same timeframe. What’s more, by March 2010, RIT Capital Partners’ net asset value per share was 8% higher than it was in March 2010.

Admittedly, the raw share price performance was less impressive, as RIT Capital Partners went from a 5% premium to an 8% discount.

Likewise, from March 2000 to March 2003, when the UK market roughly halved, its net asset per share declined by 15%. Therefore, the downside protection claim that RIT Capital Partners often trumpets seems reasonably valid.

Of course, every downturn is different, so there is no guarantee its share price will perform in a similar fashion the next time Mr Market throws a hissy fit.

Coming off the boil?

On the flip side of this downside protection, it’s not too surprising to see that RIT Capital Partners has lagged a market a little in recent years, even though its performance since inception is still pretty impressive.

It’s worth noting that a fair chunk of its long-term performance comes a stellar run from March 1992 to March 1998, which saw the share price almost quadruple, helped by a narrowing of the discount from nearly 40% to around 15%. Oh, to purchase a decent fund on that sort of discount today!

This sort of early hot streak isn’t that unusual, as quite a few funds seem to do very well when they are relatively small and nimble, only to then find it harder and harder to post market-beating figures the larger they get.

If we look at the net asset growth per share since March 1998, it’s been a rather more pedestrian 6.6% a year (plus a little more for dividends). Meanwhile, the discount has continued to narrow over that time and, for the last few years, RIT Capital Partners has traded at a significant premium, such is the demand for popular investment trusts of this ilk.

Dividends

For much of its life, dividends were a bit of an afterthought for RIT Capital Partners. From March 2000 to March 2012, it rarely increased its dividend.

But things changed in 2012, following a change to the rules allowing investment trusts to pay dividends out of capital reserves, its dividend was increased from 4p (which was a miserly yield of just 0.3% at the time) to 28p. RIT Capital Partners also said it wanted to bring its dividend more in line with its peers.

I remember that this caused a little kerfuffle at the time, as many investors seemed to hold RIT Capital Partners outside of ISAs (as indeed I did), and therefore weren’t too impressed at the extra tax they might have to pay on the increased dividend.

RIT Capital Partners’ payout has inched ahead since and, as stock markets have moved significantly higher since 2012, its yield has dropped away as a result. Currently, it offers a yield of around 1.6%, so dedicated income investors are unlikely to be too impressed.

However, one nice aspect of its dividend policy is that it announces both payouts for the year when its full-year results are released, which is usually at the end of February. Its dividends are currently paid at the end of April and October.

Charges

RIT Capital Partners is not cheap.

Its headline ongoing charges figures were 0.66% last year, but you also pay fees indirectly on top of this for the various funds it invests in. These came to 1.23% of net assets in 2017. I expect the hedge fund investments bump up the average here.

That’s an overall charge of nearly 2%. Given RIT Capital Partners’ net assets are now over £3bn, you would expect some serious economies of scale to be kicking in by now, but that’s clearly not the case.

Summary

I suspect I am somewhat biased when it comes to this investment trust because it has done pretty well for me for over two decades now. However, the high underlying level of its charges did surprise me a little when I researched this piece, as it’s a few years since I have delved into the notes to the accounts to check these details. It’s something I plan to monitor, but I don’t see it as a deal breaker right now.

The level of influence that Lord Rothschild has is somewhat of an unknown quantity, as is what might happen when he eventually departs. Much like Warren Buffett and Berkshire Hathaway, I reckon there has been a lot of work behind the scenes preparing for the inevitable, but little is disclosed publicly. You could argue that the shift away from direct investments to investing in other funds is part of the preparation process.

Despite its recent middling performance, I think RIT Capital Partners will be part of my portfolio for some time yet although, given its high single-digit premium to net assets, there’s a good chance I’ll sell down my stake a bit in the next few years for rebalancing purposes.

I’m at the stage of my life where the downside protection that it should offer in times of turmoil is attractive, especially given that the stock market has had such a great run in the last decade.

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Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!