RIT Capital Partners is one of a number of conservatively managed global investment trusts that I hold in an attempt to give my portfolio a little ballast. It seems like a good time to see how that’s working out!
23 years and counting
RIT Capital Partners has the dubious honour of being my longest-held position, stretching all the way back to late 1996 when I began with a monthly savings scheme.
I topped up with lump sums in 2001, 2003, 2011, and 2015.
I’ve yet to sell any and for quite a while it’s been one of my largest positions. However, having built up a capital gain (albeit a smaller one than I had at the start of this year!), it’s possible I might sell some in the next few years to use up some capital gains allowance and top-up some of my smaller positions.
For some time, though, I think was somewhat guilty of being asleep at the wheel with this holding, with its past performance lulling me into complacency.
I took a proper look at RIT’s holdings for one of the first articles on this blog, having just skimmed its accounts for a few years, and was surprised by the extent to which it had shifted from owning shares directly to owning them through funds. Its underlying charges have risen substantially as a result of this move.
Revisiting its progress this time last year, I concluded that despite trading at a premium of around 10% and those high underlying charges, its defensive qualities remained attractive enough.
Change at the top
Long-serving chairman Lord Rothschild stepped down last year, in what appeared to be an orderly succession plan. He’s been intimately involved with RIT from the start as its history page describes:
Jacob Rothschild joined the bank in 1959 and played a significant role in developing its business. In 1971 he was appointed Chairman of Rothschild Investment Trust which had a value of £5 million. In 1980 he left the bank to concentrate on developing the business of Rothschild Investment Trust, which was subsequently renamed RIT. At that time RIT was a listed investment trust with net assets of some £80 million.
RIT was subsequently built up through a combination of internal growth and acquisitions so that by the 1980’s it had become an investment holding company, J Rothschild Holdings plc with assets of about £650 million. As a result of its acquisition of a number of financial services businesses during this period, the company no longer qualified as an investment trust and in 1988, J Rothschild Holdings plc demerged into two entities – J Rothschild Assurance which was subsequently renamed St. James’s Place Capital plc and RIT Capital Partners plc.
RIT Capital Partners plc was listed on the London Stock Exchange with net assets of £281m on 1 August 1988. It is now one of the UK’s largest investment trusts, with a market capitalisation of around £3 billion.
It’s too early to tell if much has changed behind the scenes but, for me at least, there was nothing in its recent results that indicated a significant shift in thinking.
I speculated at the time that Lord Rothschild stepping down might result in the premium to net assets declining. That happened to some extent, even before the recent market carnage, although whether his departure was the key driver of this is impossible to know.
Key stats for RIT Capital Partners
- Listed: 1988 (around 100p)
- Manager: Ron Tabbouche (since 2012, now 46 years old)
- Ticker: RCP
- Benchmark: MSCI All Country World (50% in £, 50% local currency)
- 10-year net asset value return: 90% as of 6 April 2020
- Recent price: 1,724p
- Indicated spread: 1,720p-1,728p (0.5%)
- Exchange market size: 1,000
- Market cap: £2.7bn
- Discount to net assets: 2.3% as of 29 February 2020 (could be very different as of 31 March)
- Costs: 0.7% OCF, 3.9% KID
- Gearing: 6.5% as of 31 January 2020
- Current dividend and yield: target of 35p in 2020 (2.0%)
- Results released: March (finals) and August (interims)
- Sector: Flexible (3rd out of 17 over 10 years)
- Major holders: Rothschild family own 21%
- Links: Website and AIC page
RIT sits in the Flexible sector, having relocated from Global a couple of years ago.
While it’s mostly an equity investor, it largely uses equity funds, hedge funds, private equity funds, and direct private investments. About a quarter of its assets are in absolute return and credit funds.
Technically, RIT is trading at a discount to its net asset value at the end of February but a lot has happened since then.
The shares held up pretty well until 5 March and were just over £20 at that time having started the year at £21. But they collapsed to as low as 1,252p over the next two weeks before bouncing back to nearly £18 in just one week!
RIT has said its March net asset value should be released in mid-April so we’re a little in the dark on how its investments have held up in recent weeks. I’m hoping it releases a detailed update, much as Caledonia has just done.
But it’s good to see that the bid/offer spread on the shares has remained relatively narrow. A lot of trusts have seen their spreads widen dramatically in recent weeks and it’s put me off considering them as potential top-up candidates.
The upside/declines debate
RIT says it look to capture most of the update from bull markets while limiting the damage caused by those pesky bears:
Since your Company’s listing in 1988, we have participated in 73% of the market upside but only 38% of the market declines. This has resulted in our NAV per share total return compounding at 11.0% per annum, a meaningful outperformance of global equity markets. Over the same period the total return to shareholders was 12.2% per annum.
As far as I can tell, this statistic was first mentioned in March 2014, when the figures where 70% of upsides and 38% of declines respectively, so the numbers haven’t shifted too much in recent years.
It’s often reeled out by trust commentators, including myself to be fair, but I’m still not sure exactly how it’s calculated. Is it done on an annual or quarterly basis, or is a subjective call made as to when an upside/decline begins and ends?
And while 73% and 38% sounds impressive — i.e. most of bull markets but not of bears — as no other fund produces a similar statistic it’s hard to know whether to applaud it or shrug your shoulders.
Markets tend to rise a lot more than they fall, although falls tend to be a lot steeper.
Certainly, during the market fall of late 2018, RIT seemed to prove its worth although I’d say it fell about half as much as global markets did.
It’s too early to say how the current bear market will work out for RIT. It fell over 35% at one point but at the time of writing it’s down about 18%, roughly the same as a global tracker.
A benchmark quibble
Back in 2014, RIT tweaked the benchmark it uses to measure its performance.
Previously it used the MSCI World Index but it changed to the MSCI All Companies measured 50% in sterling and 50% in local currencies.
This introduced an increased weighting for emerging markets, compared to developed markets like the US and Europe. That seemed fair enough to me considering the way it invests.
Its current quoted-equity portfolio only has about half its assets in the US and Europe and some 40% in Asia/Japan. The low US weighting is undoubtedly a key reason its performance has trailed your common garden global tracker over the past decade.
But the currency split made the revised benchmark an easier comparator because sterling has steadily weakened over the last decade.
If we use a sterling version of the MSCI ACWI then bottom row becomes 35%, 81%, and 199%.
So, there’s little change over 3 years but the relative performance over 5 and 10 become far less flattering, especially when you look at net asset value returns.
Of course, this situation could flip if sterling had a prolonged period of strength.
As a UK-based investor, I tend to use sterling-based world indices. As far as I am aware, every other global fund or trust I own does the same. I’m certainly no currency expert, though, so there could be a fine point of detail here regarding RIT’s choice that I am not aware of.
Here’s the high-level breakdown of RIT’s portfolio.
The quoted equity part of the portfolio can be split into individuals stocks (6%), long-only equity funds (30%), and hedge funds (11%).
Likewise, RIT’s private company investments are either directly held (10%) or via funds (15%).
The fund positions typically vary between 1% and 5% of net assets. Most of the quoted equity funds seem to target specific regions while nearly all the private equity funds are US-based. The absolute return and credit funds are nearly all global.
There seems to be a fair amount of churn within the individual stock positions. Impressively, they contributed 5% to net asset value in 2019, despite being only a small part of the overall portfolio.
Perhaps it’s time RIT reversed the recent trend and backed its own judgment a little more rather than relying on fund managers?
The return on real assets last year was also very good, with the gold price doing the heavy lifting here. The year-end weighting of 3% was lower than the average of 6% throughout 2019.
I’m certainly looking for the absolute return and credit part of the portfolio to have a better 2020, relative to the other parts of the RIT’s portfolio.
Having contributed 2.4% to NAV in 2016, it’s returned around a quarter of that the past two years, despite having roughly the same portfolio weighting throughout.
Although RIT’s ongoing charge looks reasonable, it’s a different story when you look at the Key Information Document where the figure jumps to nearly 4%.
Interest costs add 0.5% and the underlying costs of funds used another 1.0%. Performance fees and the carried interest within the private equity funds account for 1.6%.
RIT has produced a document giving a bit more background and the way these calculations are being made is still evolving, making it harder to draw definitive conclusions here.
But the shift away from mostly direct investments to more of a fund-based approach seemed to take place about a decade ago. And it has also been RIT’s worst period of relative performance against the wider market.
The early signs are that RIT is planning to continue much the way it did under Lord Rothschild. With his family owning over a fifth of the shares and his daughter, Hannah Rothschild, on the Board that’s probably not a great surprise.
But he ran the roost at RIT for nearly 50 years, including nearly all the 30+ years it’s been a listed company.
Having lagged world markets for an extended period now, I’m certainly looking for RIT’s much-touted defensive qualities to prove their worth in 2020.
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!
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