I last wrote about RIT Capital Partners (RCP) in March 2012. At the time, although its long-term performance numbers were impressive, its short-term performance was starting to suffer relative to the peer group.
That picture has changed a little since then. Over 10 years, RCP’s net asset value performance ranks it fifth out of 21 global growth funds and sixth out of 22 funds over three months, so there are signs of recent improving performance.
However, over the medium term things are less rosy. This is largely the consequence, as I highlighted in a previous note, of a cautious stance on markets.
A personal approach
RCP’s fate is in the hands of its chairman and largest shareholder, Jacob Rothschild. As I suggested last time, there is a certain attraction in investing alongside someone as well connected and experienced as him.
RCP accounts for a sizeable chunk of his personal wealth and therefore, naturally, he is likely to be cautious.
However, the ethos of the fund is about passing down wealth to the next generation (Jacob’s daughter Hannah has just joined the board) and so, while the chairman’s statement taken from RCP’s latest annual accounts highlights the fund’s commitment to the preservation of shareholders’ capital, it is also focused on real growth of capital.
It uses RPI +3% as its main benchmark but is a bit more adventurous than most funds with an absolute return objective, and the management is also trying to beat the MSCI All Countries World index.
They can also take a genuinely long-term view. For instance, it is interesting RCP says its closed-end nature and stable shareholder base allow it to be more patient than most private equity limited partnership structures.
In retrospect, RCP was overly risk-averse in 2011/12. I mentioned last time that the portfolio was positioned defensively then. The management thought there were glaring risks to the global economy and that it made sense to hold large quantities of cash to take advantage of potential market set-backs.
In the event, although markets did pull back a little in the summer of 2012, there was no major fall out and generally the trend has been upward.
Cheap money provided by quantitative easing made investors more optimistic and, to date, the inflation that RCP feared would inevitably accompany the availability of this cheap money, has failed to materialise.
In 2013, RCP benefited from exposure to equities, particularly those in the US and Japan. It is a pretty good picker of stocks and managers (a large chunk of its equity portfolio is managed externally) as is evidenced by the 34.5% return on long-only equity positions over 2013 versus a 23.0% return on the MSCI AC World Index.
It also invested in some special situations such as Pepsi and Mondelez (companies targeted by Trian Partners, a multi-billion dollar activist firm that, among other things, turned around the Snapple brand and sold it for five times what they paid for it).
RCP has a sizeable allocation to US dollars but managed, overall, to make a profit on currency, not being caught out by the strength of sterling as many funds seem to have been. It kept its equity exposure about level over 2013. However, for quite a bit of the year they used derivatives to hedge their equity exposure.
Backing oil & gas and financials
RCP spent £47 million on two new private equity investments in 2013: Metron, a Norwegian oil & gas services business, and Williams & Glyn, the UK bank consisting of 314 branches spun out of Royal Bank of Scotland. The latter deal was a co-investment alongside Corsair Capital, managers of part of RCP’s private equity portfolio.
There are plenty of interesting businesses elsewhere in their private equity portfolio. The largest private equity investment is Infinity (UK data centres), RCP say this is trading well and attracting new funding. It also has stakes in Dropbox (which could be written up by £20 million when they revalue their private equity positions in June) and in peer-to-peer lender Zopa.
Generally, RCP remains cautious on the basis that equities are more fully priced than they have been for some time and there are a number of unresolved macroeconomic problems that could cause an upset. Also, they are still worried about the possible long-term effects of quantitative easing.
I really like RCP. It is hard to pigeonhole; it is a hybrid of hedge fund, private equity fund, absolute return fund, global direct equity and global fund of funds. But its long-term unconstrained approach sits well in a closed-end structure.