RIT Capital Partners, the £2.4 billion investment trust, has dramatically increased its debt to allocate more to absolute return strategies.
Through 2013 RIT, a Citywire Selection pick, took its gearing from zero to 5.2%. In December the trust signed two new £200 million revolving credit facilities with three and five-year durations on floating-interest rates of three-month Libor plus 1.2% and 1.8% respectively.
‘With interest rates held artificially low, we have also expanded our credit and absolute return strategies to ensure we are both enhancing and diversifying our sources of returns,’ said Lord Rothschild, the trust’s chairman.
‘This initiative is of particular interest at a time when we negotiated £400 million of new borrowing facilities at favourable rates, which we intend to deploy into such strategies. We consider the risk-adjusted returns to be favourable in enabling us to earn a reasonable margin of profit, both in supporting our portfolio returns and helping to offset our costs.’
Absolute return and credit investments represented 7% of RIT’s portfolio at the end of 2013, up from 3% a year earlier. This area returned 14% for the closed-ended fund through the period. RIT’s largest positions in the space are the Pine River Fixed Income fund and the Farmstead fund.
Rothschild (pictured) argued that these positions would help RIT weather any market downturn, citing economic disappointments from the US, Europe, China and Japan as key risks.
‘Inevitably higher valuations imply lower margins of safety and consequently the market's vulnerability to shocks is greater,’ he explained. ‘With the world recovery still fragile and reliant to a large extent on policy support, it is not hard to envisage markets having to deal with such shocks in the coming year and indeed they were felt during January.’
Rothschild noted that RIT’s net asset value had slipped by only 0.9% in January, against wider market drops of 3-4%, in part due to this cautious approach.
‘Our shareholders expect a clear and consistent approach,’ he concluded. ‘At the heart of this approach, rests its commitment to the preservation of shareholders’ capital, which remains our highest priority taking precedence over tactical manoeuvres based on short-term returns.’
RIT delivered a net asset value return of 18.6% last year, lagging the MSCI World index’s 23%.
‘Our 2013 performance combined appropriate levels of caution with a significant participation in stock market increases,’ Rothschild commented. ‘We did not forsake our focus on long-term growth and for this our shareholders have rewarded us with their loyalty.’