RIT Capital Partners (LON:RCP) delivered a solid NAV total return of 8.2% last year and remains defensively positioned. It is chaired by Lord Rothschild and aims to deliver long-term capital growth, whilst preserving shareholders’ capital. Since it was launched in 1988 the fund has achieved the impressive feat of participating in 75% of market upside, but only 39% of market declines, so it pays to keep a close eye on where the managers are investing.
Originally named the Rothschild Investment Trust, RIT is still chaired by the 81-year-old Lord Rothschild, although the management team is headed by CEO Francesco Goedhuis and the CIO, Ron Tabbouche, who between them have introduced a more disciplined and focused investment approach.
RIT has a core equity bias, mainly via well-managed third-party funds, and seeks to identify – through stock selection, talented external managers and special situations – opportunities at attractive levels with a margin of safety.
The investment process starts with a top-down macro view that enables the management team to reduce the net quoted equity exposure at times of heightened risk. This has been the case in the last few years during which the average allocation, after taking into account the hedging, has been gradually reduced from 55% in 2015, to 46% in 2016 and 44% last year.
At the end of December the gross exposures before hedging consisted of: long-only equity funds (28%), absolute return and credit (25%), hedge funds (20.8%), private equity funds (12.7%), unquoted direct equity holdings (9.1%), quoted direct equities (6.8%), real assets (3.5%) and bonds/other (1.2%). Most of these areas made a positive contribution to the return in 2017 in local currency terms, with the long-only funds and hedge funds being particularly strong.
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Taking a top-down view also allows the managers to deploy an active currency overlay strategy in an effort to enhance shareholder returns. This has added considerable value in the past, but the high US dollar exposure at the start of last year really detracted from the performance and was reduced to 30% at the year-end, while the euro weighting was increased from 4% to 12%.
Writing in the accounts Lord Rothschild said:
‘The world has undoubtedly recovered from the global economic crisis of a few years ago. The question is whether such benign conditions are sustainable. Quantitative easing is in the course of being phased out, and interest rates are rising. Debt levels are higher – indeed significantly higher than at the time of the financial crisis of 2008. The World Bank and other luminaries are highlighting the risks to the present growth in the global economy, in particular over the medium term.
‘…. [Global] stock markets have experienced a resurgence in volatility and we ask ourselves whether current valuations remain excessive, adequately reflecting the risks which lie ahead. Are we in the last chapter of a bull market, and one which is already the second longest in the post-World War II era?’
The fund’s emphasis on capital preservation mirrors the needs of many private investors, but despite this it has still managed to generate compound total NAV returns of 11.3% per annum since it was launched in 1988. This is well ahead of both the MSCI World and the FTSE All-Share, with a lower level of volatility.
RIT is a rare if not unique investment trust that over the decades has delivered better than market returns at a lower level of risk. It exists in the middle ground between the gung-ho managers who outperform in bull markets and the perma bears who are always positioned to withstand the periodic sell-offs and as such it warrants a place in most private investors’ portfolios.