Invest in a promising new chapter at RIT Capital Partners

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Everyone likes to think that they are essential. When Randolph Churchill resigned as chancellor in 1886, he expected to bring down the government. But his successor George Goschen did a job at least as good as him. Churchill’s career and reputation were ruined and he later admitted: “I had forgotten Goschen.

Jacob Rothschild may therefore have mixed feelings about the success of RIT Capital Partners (LSE: RCP) since stepping down as chairman in 2019. His family, which represents over 25% of the £ 4.2bn company, are clearly benefiting from the strong performance, but he may be upset that the team management does very well without it. Investment returns of 18% over six months to June 2021 and 42% over 12 months are among the best in the global industry and well above the 12% and 26% returns of the MSCI All Countries Index in pounds sterling.

New promising investments

RIT aims to generate long-term capital growth while preserving shareholder capital. It seeks to outperform relevant indices “over time”, but expects to fall behind in rising markets. “RIT has lagged slightly behind the benchmark over the past five years (until June 30) but performance volatility and correlation with the index are low,” notes Chris Brown, analyst at JPM Cazenove. The trust’s performance has accelerated over the past year, but its shares were still trading at a 6% discount to net asset value this week.

This acceleration is largely due to the success of private equity investments, which contributed 13% of the overall return of 19% in the first half. Private equity accounts for 29% of the portfolio but that excludes Coupang, the Korean e-commerce company, which was listed in March and jumped 40% in its early days. It made up 9% of the portfolio by mid-year, although its share price fell 13% in July. It contributed 5.5% to the overall performance of the first half.

There were several other bright spots in the private equity section, which includes exposure to funds as well as direct investments. A new £ 29million investment in the Robinhood stock trading platform is doing well and the £ 50million investment in Webull, another trading platform in the US, looks promising . The absence of Rothschilds does not limit RIT’s access to bargains around the world; the management team is well connected and the Rothschild name is still a door opener.

The portfolio of listed equities, which represents 52% of the total, contributed 6% to the overall return. There has been a shift towards defenses, which could help reduce the volatility of returns, including consumer goods producers Unilever and Reckitt Benckiser. Another 20% of the portfolio is made up of absolute return investments and credit, which contributed 1.6% to the overall return.

Bolder decision making

Rothschild’s shift to a younger generation likely resulted in increased daring in decision-making. It’s hard to imagine RIT under Rothschild investing in Coupang or Robinhood, or allowing a debt-to-equity ratio of around 10%. Clearly, management is positive about the outlook for the portfolio.

The only negative points are a tendency to overhedge currency exposure in sterling (49% of the portfolio in the half year) which is costly when sterling is weak. At 1.6%, fund costs are high, thanks to investment in third-party funds, and there is also a management incentive program. These costs are a problem for many asset managers who charge their clients additional fees, but direct investors should only be concerned with net performance, which is excellent.

My skepticism at the end of last year was wrong. RIT should be a key part of any investment trust portfolio.


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