Buying opportunity for RIT Capital Partners

RIT Capital Partners has the ideal mandate for private investors and after slipping to a discount for the first time in years offers a decent buying opportunity.

RIT Capital (LON:RCP) is a £3.4bn global investment trust that aims to deliver long-term growth, while preserving shareholders’ capital. This is not an easy combination to achieve so it measures its performance against two benchmarks: the global equity MSCI All Country World index and the retail prices index (RPI) plus three percent per annum.

Over the ten years to the end of May the total shareholder return of 95.2% was well behind the 153.4% generated by the equity benchmark, but comfortably ahead of the 74.3% increase in the inflation-adjusted target, which is consistent with its reputation for capturing a high proportion of the upside, while minimising its exposure to the downside.

The long-term record is even more impressive. Since inception in August 1988, it has participated in 73% of market upside and only 38% of the market declines, with an annualised shareholder total return of 12.2%, which is well ahead of global equity markets.

The portfolio

Originally chaired by Lord Rothschild until he stepped down last September, the fund still retains its long established characteristics as a well-managed, sophisticated family office.

Most of the underlying portfolio has been entrusted to a well-thought-out collection of specialist managers that provide exposure to attractive asset classes. At the end of May these comprised a 37% allocation to long-only equity mandates, 12% to quoted equity hedge funds and 27% to absolute return and credit.

The balance consisted of a 17% investment in private equity funds and ten percent in direct private investments, with three percent in other assets making up a gross exposure of 106% after taking into account the six percent of borrowings.

Its underlying geographic allocation favours the US at 38% and the emerging markets at 23%, but there is an active currency overlay strategy that tries to add additional value. Much of this overseas exposure is currently hedged back to sterling with the main resulting positions being 18% in the US dollar and ten percent in the Japanese Yen.

Performance during the pandemic

For the four years leading up to the pandemic RIT shares had consistently traded at a sizeable premium to NAV that stood at 11% at the start of the year. This made it extremely vulnerable to the sell-off with the shares falling from over £20 to less than £14 before recovering to around the £18 level.

By the end of May the year-to-date share price total return was a loss of 14.1%, yet the NAV was only down 4.4%, with the shares slipping to a small discount that currently stands at five percent. The de-rating has prompted the analysts at Winterflood and Stifel to add the fund to their list of buy recommendations with both believing that it is well-placed to deliver attractive long-term absolute returns.

If you are thinking of investing it would be sensible to wait for the publication of the end of June NAV. The problem is that about a quarter of the fund is invested in private equity, which is difficult to value and could suffer further write-downs to reflect the decline in listed share prices.

Apart from the difficulty estimating the daily NAVs, the main drawback is the high charges. When you add the annual fees of the underlying managers to RIT’s own fees the cost gets up to about two percent, which is going to eat into any value they are able to add.