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RIT Capital’s ‘preservation mode’ lags strong market

Rob Morgan
Investors have been attracted to the strong long term growth and relatively low volatility of RIT Capital Partners Investment Trust, but recently it has been outpaced by strong markets.

RIT Capital is an investment trust with a broad portfolio of assets. By owning a diverse range the overall aim is to beat inflation while limiting the ups and downs usually associated with investing in the stock market.

Shares make up the core, represented by managed funds and some individual stocks, and this is supplemented by bonds, absolute return funds, investments in private companies and downside protection through derivatives.

Performance has typically lagged in periods of rising share markets given that a proportion of the portfolio is invested in defensive or infrequently-valued assets, but it has tended to be more resilient during weaker periods. In 2017 share markets performed well and the manager’s cautious positioning led to somewhat pedestrian returns from the Trust in comparison.

There was an 8.2 per cent total return on net assets in 2017 in comparison to 16.5 per cent from the global equities index it uses as an informal benchmark. However, it did beat its formal benchmark of retail price index (RPI) inflation plus 3 per cent a year – a hurdle of 7.1 per cent. Shareholders experienced less than this, a total return including dividends of 5.8 per cent, due an erosion of the share price premium. Source for data: RIT Capital Annual Report, figures to 31/12/17), past performance is not a guide to the future.

Source: FE Analytics, Total Return basis with net income reinvested.

Unsurprisingly, it was a good period for the portion of the portfolio invested in shares. Specialist third party funds, individual equity investments as well as private investments not listed on any market all fared well. The private holdings are sourced through the manager’s network of contacts and are not available to most investors. Currently, these include Acorn, one of the world’s largest coffee businesses, and CSL, a UK-based alarm signalling business.

Over the course of the year profitable sales were agreed of two direct private investments – Rockefeller Financial and GVQ, the UK investment manager specialising in smaller companies. Looking ahead, the managers anticipate the sale of two further investments, Helios Towers, the telecoms towers company in Africa, and Dropbox, the cloud storage company.

In terms of overall equity exposure, the managers have shifted towards emerging markets in recent months adding specialist Indian and Chinese funds. As a result, emerging markets now account for around a quarter of the overall equity exposure, with this heavily focused on Asia. The fund’s allocation to the US was reduced and tilted towards sectors expected to benefit from an increase in interest rates such as financials.

The share portion of the portfolio remains overweight in Europe, reflecting lower valuations and a belief that European economic growth is picking up while monetary policy remains accommodative. Japan also remains an important area for the managers owing to relatively low valuations, loose monetary policy and market-friendly corporate reforms.

Although the managers’ belief “in the merits of holding equities over the long term remains unshaken”, they are exercising caution on current valuations feeling there is little margin of safety to allow for negative surprises. In particular they question whether the “benign conditions” that have driven stock markets to “extraordinarily high levels” can continue.

RIT held less than half of its portfolio in mainstream shares last year, with exposure averaging 44 per cent, down from 46 per cent in 2016. Given the cautious short term stance it would not be a surprise if the proportion in shares is further reduced over the coming months.

Increasingly, the focus is on stock selection opportunities “at attractive levels with a margin of safety” and key long term structural growth themes such as healthcare and technology. Differentiation and diversification continues through 22 per cent in private companies, 25 per cent in absolute return and credit funds and 9 per cent in ‘real’ assets such as gold and physical property.

Our view

With the Trust conservatively positioned the muted returns seen in 2017 were to be expected. Performance was also impeded by a weaker US Dollar with the portfolio 60 per cent exposed to this currency at the start of the year. Nonetheless it built on strong returns in 2016 when the portfolio was more aggressively orientated, and the managers await the chance to increase risk as and when they feel it is right.

We continue to believe the management team, supported by its connections to leading third-party managers, is well placed to capitalise on opportunities across a range of asset classes and has the flexibility to perform well in various environments. It remains part of the Charles Stanley Direct Foundation Fundlist of preferred investments across the major sectors.

This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.