RIT Capital Partners Summary. Portfolio

Transcription

1 Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. RIT Capital Partners Summary RIT Capital has twin objectives: to generate long term capital growth, and to protect shareholders capital. To this end, it invests in a broad range of asset classes, each exhibiting differentiated returns. This, along with judicious management of risk (including currency) exposure, is how the trust aims to protect its investors in troubled economic environments. The trust offers the opportunity to invest alongside Lord Rothschild and family, who own a fifth of the shares, and the management invests with the long-term perspective and focus on capital preservation of a family office. The range of assets and strategies employed is unique, and the network of contacts and relationships the company has, allows it access to managers, funds and private investments that the average investor would otherwise be unable to buy. The company is currently cautiously positioned, with management concerned about the distortions created in the markets and economy by QE and low interest rates. As a result, hedge funds and absolute return strategies are a significant part of the portfolio, government bonds and rates exposures at practically zero. The managers estimate that net equity exposure for the year has been c.44 on average. The trust has been trading on a premium to NAV since 21, barring a small window where it traded at a small discount following the Brexit vote. The trust does not aim to outperform any benchmark, however sluggish performance relative to a fastrising market last year has seen the discount come down slightly to.1, from an average of 6 last year. Portfolio RIT Capital breaks down its holdings into four basic categories: listed equities, private investments, absolute return/credit, and real assets. For a while now, the managers have been in capital preservation mode. For example, over the year, the trust had an average net exposure of 44 to listed equities. The five-year range has been 3 to almost 7, and compares to 46 at 216 year end. The net exposure represents the gross exposure (represented in the graph below), less the derivates exposure and liquidity. Absolute Return and Credit Private Investments Source: RIT Capital Partners RIT Capital gross exposures NAV at end 217 Real Assets Quoted Equity The broad categories in the graph above hide a much more varied portfolio however, with the quoted equities including directly held stocks (28 of quoted equity at year end), long only funds (41) and the relevant exposures of hedge funds (31). One of the distinctive features of the trust is the network of contacts that Lord Rothschild has developed over the years. This means that the company can often obtain access to managers others can t, either in closed funds or employing managers to run mandates solely on their behalf ( funds of one, is their term). A relatively recently-added example is a fund focused on arbitraging already announced M&A deals, which is particularly active in the UK mid cap space. Private investments include investments in private equity funds as well as individual private investments or co-investments made by the in-house management team. Here the network of contacts and relationships is even more important in generating ideas and opportunities. This part of the portfolio has seen some realisations in recent months. Dropbox was 1 of NAV at end 217. The company has not yet released details of its gains on this investment, but we understand that they sold out in entirety at IPO. Last October the company sold their entire stake in the wealth management company of the Rockefeller family for 43m (1.6 of NAV). While the company has also agreed the sale of GVQ Investment Management to management, having bought it in 214, since when AUM has doubled and profits tripled. Investments in this silo are opportunistic, but the managers say that currently there is a bias to realisations, which is in keeping with their view of markets as being quite richly valued overall. The managers aim to minimise the risk to the downside on these investments, looking to structure their involvement with

2 optionality where possible, to give more debt-like characteristic to their holdings on the downside and equity-like characteristics on the upside. Absolute return and credit includes fixed income investments as well as absolute return funds or hedge funds which aim to protect capital, in particular when equities underperform. The absolute return exposure, which has grown in recent years, reflects Lord Rothschild and team s concerns about the valuations of fixed income markets and the distortions of QE. The real assets include gold (9 gross of year end NAV) and properties (3). Most notable among these is Spencer House in Mayfair, whence the company is managed. The company aims to generate returns from six cylinders see below. One of those not so far discussed is active currency management. This is managed on a look through basis, with overall exposures adjusted and managed through the derivatives market. The trust has been highly active with respect to currency, with one of the key trades last year being a steady reduction in the weighting to the dollar in preference mainly for sterling. Investors should consider the currency issue when investing. The trust is global in remit, which implies a built in short on sterling, but takes as one of its benchmarks the MSCI AC World calculated with in sterling, which reduces the implicit short (the UK makes up only 6 of the MSCI AC World). THE SIX CYLINDER APPROACH CYLINDER STRATEGY 1 Theme driven 2 High conviction single stocks 3 Investing via exceptional third party managers 4 Active currency management Downside protection 6 Private investments Source: RIT Capital only China A-Shares hedge fund manager to run a fund of one in that market, hoping to take advantage of what they believe to be an inefficient market. In terms of outlook, Ron Tabbouche (chief investment officer) says they think of the economic cycle as being in the 8th innings. Having checked, there are nine innings in baseball, so this explains the manager s cautious positioning. Interestingly, the company took advantage of the sell-off in bond proxies at the start of the year, taking a direct equity position in Reckitt Benckiser after its 2 share price fall as well as in other consumer staples. Gearing RIT Capital largely uses gearing opportunistically. The manager underlines that the level of debt reflects the opportunities they see and this calculation obviously includes the rate they can borrow at. With rates rising and the team cautious on the outlook for the global economy, as discussed above, they expect it to drift down. However, they do have some long-term debt, taken out when they saw an opportunity in the low level of borrowing costs. This was worth 163m at the end of 217, with a par value 11m. With the addition of short term revolving credit facilities, the company s available gearing is 1.4 of NAV. Currently much of this gearing is netted off by 8 cash, leaving the trust c8 geared. of NAV RIT Capital: Gearing Overarching everything are the top-down themes which guide the portfolio. These come from the investment committee discussions led by Lord Rothschild and set the overall attitude to risk and also to identify certain trades or themes for investment. For example, at the start of the year the trust took out a small short position in the bond market to provide returns in an anticipated downturn there. At the time of writing, the managers are most positive on Asia, having built up their weighting there over the past 18 months. Overall, they have around 2 in emerging markets, most of that being in Asia. The company has awarded a mandate to a long Returns RIT Capital Partners As the graph below shows, RIT Capital has comfortably beaten its absolute performance target of RPI +3 in recent years. Against the MSCI AC World Index in sterling, NAV has struggled to keep up. While investors should be aware of this capacity to lag a rising market, this has to be seen in the light of the lower exposure to equities of the trust and, indeed, its raison d etre which is to protect wealth as much as grow it. Over five

3 years its net public equity exposure has been roughly between a third and two thirds. According to RIT s own calculations, the trust has participated in 7 of market up moves on average and only 39 of market down moves RIT Capital returns versus benchmarks as of end Feb year 3 years years 1 years RIT Capital NAV RPI + 3 MSCI AC World ( ) Over a longer time-frame, the trust has performed better than peers as the graph below demonstrates. RIT Capital has outperformed both open and closed-end fund flexible sectors by over 1 per cent over five years. The trust has fared well against its peers in the Morningstar IT Flexible Investment sector, outperforming in each year since 212 except for 217. However, the sceptical, cautious outlook means the fund failed to keep up with rising equity markets in 216 and RIT Capital: Discrete annual returns Recent performance has been relatively lacklustre in absolute terms when compared to equity markets. Over one year the fund s NAV returns have been in line with its peers in the open and closed ended flexible investment sectors. The outlook of the trust s investment committee is clearly very wary. They are sceptical of current market valuations and while not predicting a correction in the near term are more worried about the downside than the upside RIT one year performance verus sectors RIT Capital Partners Ord (NAV) IA OE Flexible Investment 11/4/217 to 11/4/18 Jul '17 Oct '17 Jan '18 Apr '18 Morningstar IT Flexible Investment -1-2 RIT Capital Partners (NAV) Morningstar IT Flexible Investment MSCI ACWI When Ron Tabbouche was hired from GAM in 212 he brought with him an absolute return mindset and the exposure to TAR (targeted absolute return) and hedge funds has increased over recent years, reflecting the company s aim to be protected when the cycle ends, and the team s belief that fixed income will not be able to play its traditional role as a diversifier as it did in previous cycles. Whilst this may mean the trust is better placed if markets hit a downturn, it also means the trust is unlikely to participate fully if a reflation style rally occurs. Dividend The board intends to pay a solid dividend and has an aim to increase it above inflation, or maintain it at the very least. In the latest annual report, the board announced that the dividend for 218 will be 33p a share, up 3.1 from 217. Over the past five years the compound annual growth rate has been 3.3 p.a RIT five year performance versus sectors 11/4/213 to 11/4/18 RIT Capital s portfolio generates relatively little natural income, and the trust s expenses - ongoing costs, interest payments etc - outweigh any income that the portfolio generates. Dividends are drawn from capital for which the company has authority from shareholders. Management RIT Capital Partners Ord (NAV) Morningstar IT Flexible Investment IA OE Flexible Investment RIT Capital is internally managed. The investment functions of the trust are led day to day by CIO Ron Tabbouche (ex GAM) and CEO Francesco Goedhuis (who has worked with Lord Rothschild

4 since 21), both of whom are members of the investment committee chaired by Lord Rothschild, the dominant voice. The other members are Roberto Ruhman and Ed Eisler, as well as the company s CFO and COO. Lord Rothschild and his family / trusts continue to own a very significant stake in the company, amounting to 21. We understand that the board are aware that investors value the Rothschild family s involvement and the long-term perspective it brings, and the appointment of Lord Rothschild s daughter to the board in 213 is intended to highlight the family s continued commitment. The team have a variety of incentive plans, linked to NAV performance relative to the relative and absolute benchmarks over one and three years which aligns them to shareholder s interests. The scheme is capped at.7 of NAV in an up-year and.2 in a down year. There is also a longer-term incentive plan measured over periods up to 1 years. Charges The OCF for the trust is.66, compared to an average of 1.3 on the average flexible investment trust. However, RIT estimate that shareholders are also paying to external managers an additional Total look-through fees are therefore c. 1.9 before performance fees, so the trust cannot be described as cheap. The KID Reduction in Yield number is 4.2. Internal performance and incentive fees are capped at.7 of NAV, or.2 if the NAV has declined in any year. Discount The trust has no formal discount control policy. However, it has a strong following among both private and professional investors and this, along with its track record of protecting capital, has meant demand for its shares has been strong during recent turbulent market and political conditions. As a result, it has been trading on a premium consistently since late 21 with the exception of a couple of very brief periods in 216 such as following the Brexit referendum. In fact, at times the premium has reached almost 1. The premium did narrow in the first quarter of this year ahead of results, as the trust s NAV lagged a sharp rally in January, however it is back up at., marginally below its one-year average. 1 RIT Capital historic discount 2/4/13-3/3/

5 Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. Important Information Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions. The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-us Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons. This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice. This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm s internal rules. A copy of the firm s conflict of interest policy is available on request. Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction. PLEASE SEE ALSO OUR TERMS AND CONDITIONS Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/1 Savile Row, London W1S 3PF with registered number OC Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.