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Ron Tabbouche on RIT’s key calls
by Robert St George on Jan 28, 2014 at 13:05
The investment director of the £2.3 billion RIT Capital fund discloses the five themes driving the trust
Addressing the Winterflood Investment Trusts annual conference, Ron Tabbouche – investment director of the £2.3 billion RIT Capital fund – disclosed the five themes driving the trust, discussed its recent performance and Lord Rothschild’s involvement in its management.
Tabbouche’s first theme is technology. ‘It permeates our portfolio,’ he said. In particular, he highlighted the attractions of younger firms given that the industry ‘is currently at a very disruptive stage’.
RIT has seeded a technology hedge fund, with which it also works closely on its own direct investments. Tabbouche cited Dropbox as a successful example of the latter.
RIT first adjusted its approach to Japan in late 2012. ‘Beginners’ luck, just as I joined’, according to Tabbouche. The fund at that point moved out of large-cap quality names and into cheap, under-owned firms.
For Tabbouche says this is still a wise investment. He noted that half the market trades on price-to-book ratios of less than one despite businesses being ‘loaded with cash’ and policy remains supportive, although Tabbouche observed that ‘it’s not about policy, it’s about faith now’. He added that Japan is ‘structurally undervalued’; having once comprised 40% of the MSCI World index, it is now down below 10%.
Despite a prolonged slump in emerging market equities, Tabbouche insisted that ‘there is a huge amount of alpha where structural reforms are genuine’. His preferred plays at the moment are domestic Chinese sectors, Mexico, and frontier markets.
Tabbouche also revealed that he has been adding to Russia. ‘It is very difficult to find something cheap, structurally underowned, and where you can see a catalyst for change.’ With the MSCI Russia index on a forward price-to-earnings ratio of 4.3, he suggested that any re-rating would send share prices surging. And he added: ‘Speaking to our managers, we see a directional change in corporate governance.’
‘We don’t want the market performance to be the overriding factor in our performance,’ Tabbouche said. RIT has turned in particular to specialist fixed income funds that offer uncorrelated returns. These include Fortress Credit Opportunities, a distressed credit fund, and direct holdings of Virgin America senior notes. This element of the portfolio was viable because of how cheaply RIT could borrow, Tabbouche said. ‘It helps us make the most of our balance sheet.’
Of the active funds in which RIT invests, Tabbouche singled out the Viking Long fund, Egerton Capital, Lansdowne Developed Markets, Brant Point, and the BlackRock European Hedge fund. These, he explained, offered an ‘independent’ complement to RIT’s own positions.
Over the past decade RIT has performed impressively, returning 160% compared with 76% from the MSCI World index. More recently, though, performance has lagged: RIT’s 14% over the past three years is significantly behind the MSCI World’s 30%.
To address this, Tabbouche has made the portfolio a lot more concentrated since joining from GAM in September 2012. ‘We have taken our best ideas and really backed them.’ In 2013 he felt RIT ‘made very good progress’ in focusing on its five core themes.
Tabbouche claimed that RIT enjoyed a ‘healthy’ participation in the equity rally last year, but with less risk. The fund generated 16% on a net asset value basis for the year, against 22% from the MSCI World. He added that RIT had spent 90 basis points from its performance on buying puts for protection last year.
Looking ahead, Tabbouche said that RIT’s performance should be assessed on a long-term basis. ‘You need at least five years given so many parts of the portfolio are back ended.’ And for 2014, he hoped for a calmer environment. ‘We don’t want a roaring market this year so the outperformance shines through.’
Finally, Tabbouche confirmed that RIT’s 77-year-old chairman Lord Rothschild was an active member of the team. Lord Rothschild still chairs the weekly investment committee, for example, and Tabbouche emphasised his engagement on macro issues and currencies. ‘He is involved. He is full of ideas. He brings the place to life.’