RIT Capital Partners (LON:RCP), the highly regarded investment trust chaired by Lord Rothschild, has recently released its annual results for 2016 and confirmed that it is maintaining its defensive positioning.
The £2.9bn fund began life as the Rothschild Investment Trust and was set up to manage part of the wealth of the UK branch of the Rothschild family. It was listed on the London Stock Exchange in 1988 and aims to deliver long-term capital growth, while preserving shareholders’ capital.
Between inception in 1988 and the end of 2016 the fund has managed to build up an exceptional track record by participating in 76% of market upside, but only 39% of market declines. This has resulted in an average annual NAV total return of 11.5%, which is well ahead of the 8.8% per annum achieved by the MSCI All Companies World index (in Sterling terms) and the 9% annual return generated by the FTSE All-Share.
RIT invests in a widely diversified, international portfolio across a range of asset classes, both quoted and unquoted. It has seven core strategies: quoted equity; private investments; absolute return and credit; real assets; government bonds and rates; currency; and liquidity and borrowings.
The quoted equity portfolio started 2016 at 67% of NAV and was gradually reduced to 55.6% at the end of the year, with the average net exposure after hedging being 46%. Four-fifths of the year-end weighting was made up of externally managed long-only funds and hedge funds, with the balance comprising direct equity holdings.
Its external managers generated much weaker performance than in 2015 due mainly to their defensive bias that failed to benefit from the shift in favour of cyclicals in recent months. They remain cautious on valuations and believe that there is little margin of safety to allow for negative surprises, although they continue to like the long-term growth prospects of areas like healthcare and technology.
RCP’s direct equity portfolio was reduced from 20% of NAV at the start of the year to 9% at the end. This did reasonably well and includes thematic positions, as well as specific companies that should benefit from policymakers’ continuing efforts to reflate economies, such as US financials and the industrial sector.
Given the fact that quoted equities account for such a high proportion of the fund it is disappointing that they only contributed 0.4% of the NAV total return of 12.1% that accrued during 2016.
Other core strategies
A more successful area was the absolute return and credit exposure that was increased from 14.2% to 23.6% over the course of the year. This aims to generate a high single-digit return using assets that have a low correlation to equity markets by investing in credit funds and absolute return funds, as well as direct positions in corporate bonds. It contributed 2.4% of the NAV total return with a relatively low level of risk.
Private equity positions make up around a quarter of the portfolio and contributed 1.7% to the year’s return, while the small positions in real assets and government bonds & rates added virtually nothing.
The vast majority of the fund’s NAV total return – 9.6% out of 12.1% − came from its currency overlay strategy.
The vast majority of the fund’s NAV total return – 9.6% out of 12.1% − came from its currency overlay strategy. RCP went into 2016 with a 47% exposure to Sterling, but reduced this to 34% before the Brexit vote and then 25% straight after it became clear that further falls were likely.
At the end of 2016 just 24% of the NAV was exposed to the pound, with the largest area being the US dollar which accounted for 62% of the currency allocation. These actively managed weightings reflect the Board’s view that the UK economy will increasingly be impacted by Brexit.
Dividend, charges and gearing
The Board has announced that it intends to pay a dividend of 32p in 2017, with 16p paid in April and the other 16p in October. This gives the shares a prospective yield of 1.7% and the aim is to maintain or increase this level in the years ahead, subject to unforeseen circumstances.
At first glance the fund’s ongoing charges of 0.68% look to be very good value, but they exclude performance related pay, as well as the fees charged by third-party managers that are estimated at 1.17% of average net assets.
Despite the cautious outlook the fund continued to use gearing throughout the year and finished 2016 with drawn borrowings of £426m and liquidity balances of £201m. The net result was equivalent to gearing of 14.7% with an average interest rate paid on the debt of 2.4%.
Performance and outlook
The Board believes that the 12.1% NAV total return was a creditable outcome given their defensive positioning. This was well behind the 18.9% achieved by the MSCI All Companies World index (50% in Sterling and 50% in local currencies), but ahead of the fund’s absolute performance target of RPI plus 3% per annum.
Perhaps the most telling statement in the accounts was Lord Rothschild’s assertion that: “At this time of upheaval and uncertainty, our investment portfolio will continue to be well diversified. There could well be a period ahead of us when the avoidance of risk is as high a priority as the pursuit of gain.”
At this time of upheaval and uncertainty, our investment portfolio will continue to be well diversified. There could well be a period ahead of us when the avoidance of risk is as high a priority as the pursuit of gain.
– Lord Rothschild
A few years ago RIT had started to drift as the portfolio seemed to lose focus, but it has become much more disciplined in its investment process since Ron Tabbouche joined as CIO in late 2012 and Francesco Goedhuis was appointed CEO in early 2014. The two of them have presided over a much stronger period of performance with the NAV rising 58.7% over the three years to the end of December 2016.
In the last calendar year the fund generated a share price total return of 14.2%, as the premium to NAV expanded from 6.9% to 9.0%, but this has since narrowed to 3.3% as the NAV has continued to increase.
RIT’s defensive positioning means that it will inevitably lag behind a strongly rising market, but it has shown that it is able to protect capital in more difficult periods. This fits well with the aim of many private investors and the fund remains a good, core portfolio holding for the less adventurous.