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Investment Trust Insider: RIT Capital - not cheap, but still high value

Investment Trust Insider: RIT Capital - not cheap, but still high value

RIT Capital Partners, the investment vehicle associated with Jacob Rothschild, has been in the news recently as it announced a tie-up with another branch of the family – launching an investment management joint venture with private bank Edmond de Rothschild Group.

The company was founded in 1961 and listed in June 1988. The central aim is to grow investors’ capital over the long term, while preserving it in downturns. The long-term returns suggest it has been remarkably successful in achieving this; RIT’s 10-year performance numbers now rank as the best in the global growth sector. The short-term numbers appear less spectacular, though, and this might be thanks to its cautious stance on markets.

It uses the MSCI World as its benchmark, but the fund’s portfolio bears little resemblance to that index. It is wide-ranging, encompassing direct-listed equity stakes, investments in equity, hedge, money market and commodity funds, direct and indirect private equity holdings, property and government debt.

The portfolio is well diversified, with the top 10 holdings accounting for just over 20% of the fund. As a consequence of the investment style, its shares have a much lower correlation to movements in markets than most other generalists.

It can achieve such a high level of diversification in part thanks to its size. The market cap is just under £1.9 billion, but it also benefits from its long-term outlook and from being a closed-end fund – this portfolio would not sit happily in an open-ended fund.

More than half the fund is invested with external investment managers. It sees its ability to access the best available talent as a big positive for the fund (contrast this with Alliance Trust).

Given the focus is on capital growth, it is perhaps unsurprising the dividend is tiny – the shares yield just 0.3%. The income is also dented by the fund’s running costs.

The company employs about 80 people in various capacities – ranging from those employed in the banqueting business at Spencer House (a palatial house overlooking Green Park and one of its investment properties) up to Lord Rothschild (directors’ base salaries and fees were £1.25 million in the year to 31 March 2011 and he earned about a third of that). On top of this, it pays annual fees and some performance fees to the managers of the funds it is invested in. The total expense ratio in 2010/11 was about 1.7%.

Stable reputation 

The low yield, though, does not seem to put off investors. Share purchases by private shareholders, attracted to the fund by the emphasis on capital preservation and the chance to align their interests with those of Jacob Rothschild, have helped keep the discount narrow and it currently trades close to asset value.

The tie-up with Edmond de Rothschild creates a new investment management company. Edmond de Rothschild is injecting its successful $2.7 billion AUM hedge fund business, Capital Holdings, into the venture and the two parent companies will cement their relationship, with Edmond de Rothschild getting a stake in RIT Capital via an issue of £14 million worth of new shares at asset value.

Going into business with another branch of one’s family might seem like an obvious move, but this is one of a number of links with other family investment businesses. As examples: John Elkann, the head of the Agnelli (Fiat) investment firm used to sit on the board, Johann Rupert (Compagnie Financiere Richemont) is a co-investor in RIT’s alternative asset management business – Renshaw Bay Limited (set up by Bill Winters, ex-JP Morgan and a non-executive director of RIT). RIT also recently co-founded a £65 million bio waste energy project, Tamar Energy, alongside Arabian and Brunei sovereign wealth funds and the Duchy of Cornwall.

The last interim management statement (there are no monthly factsheets – perhaps a reflection of their long-term outlook) as at 31 January this year showed about 55% of the fund was invested in quoted equities – about 5% up over the previous four months.

That might suggest they were getting more bullish, but they are anything but – describing the risks facing the global economy as “glaring”. They say cheap money is encouraging risk taking and fuelling inflation. They have decided the best course of action is to ensure the portfolio is liquid enough to be able to take advantage of market setbacks as they occur. To increase their flexibility, they borrowed $400 million at an effective rate of 3.43% fixed until December 2013. They have an equivalent amount invested in Canadian and Australian government bonds.

The focus of the equity portfolio is on large companies – RIT thinks valuations in some sectors have got out of line and it is seeking to take advantage of this. It has participated in the boom in commodity prices – investing in funds such as Baker Steel and Black Rock Gold & General, as well as buying physical commodities – but is now wondering whether that boom is starting to run out of steam. 

It is hard to argue the fund is cheap, especially given its poor relative performance over the past year, but it does offer a genuine alternative to other global generalists and, at a time of uncertainty, might be a less risky investment than some of the other global growth funds.

James Carthew is a former director of Advance UK Trust

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