Article from Investment Trust Newsletter December 2024. For full access to all articles and back copies, please SUBSCRIBE HERE.
RIT CAPITAL PARTNERS
(RCP, 1911p)
In a period when there has been a great deal of focus on wide discounts, RIT Capital Partners has been part of the discussion. This self-managed long-term wealth creation trust was premium rated for most of the period from 2015-2019, such that we commented in December 2019 “we think the 12% premium to net asset value is looking a bit rich at present against its 12-month average of 8.1%.” Over the last twelve months the rating has been very different indeed and the trust’s average discount has been 27%, currently close to that at 26.5%. The trust had a couple of bad years in 2022 and 2023, but has picked up in the year to date with a NAV total return of +8.8% to the end of October and looks as though it may be oversold. We tuned in to a call with CEO Maggie Fanari and CIO Nick Khuu to gauge the prospects and outlook.
The trust’s investor relations firm Cadarn Capital says the trust may have been mis-cast as a capital preservation vehicle in the flexible investment sector and is better characterised as a global equity strategy with clear diversification and access to global management teams that are often unavailable to investors. The trust is trying to communicate its message now under its refreshed management team. Maggie joined as CEO in March after 20 years at the Ontario Teachers Pension Fund, and Nick has been joined by Mike Dannenbaum from Allianz Bernstein and Frank Ducomble from Morgan Stanley in what is described as a “beefed-up” team. They are looking for the best risk-adjusted investments around the world, blended in a way that provides real diversification from uncorrelated assets, always with an eye on quality.
About a third of RIT’s assets are in private companies, which has been perceived as a risk and a reason for the discount over recent times. Maggie points out though that the returns from private companies have outstripped the returns from public markets over the last decade and that this is not a new area for the trust. She says the private portfolio allows good access to major growth themes like AI, software, and healthcare and that there have been some good mark-ups in the valuations. Private holdings are key to the offering here, and the trust has no intention of stepping away from this part of the market despite two years of poor performance. Maggie says that conditions are changing now, with falling interest rates, more realisations and growth in M&A. “Like any cycle”, she says, “this will play through.” Nick is excited about the prospects for public market equities too, explaining that the higher cost of capital means greater dispersion in company performance, so good stockpicking really matters. Whilst the Magnificent Seven have been dominant in driving markets, this means that other sectors and regions have been overlooked, creating the possibility for higher returns for those who have taken a different view. RIT has a mix of fund investments and direct investments, and in terms of the mix of equities and other assets the portfolio has around 70%-75% in equities, 20%-25% in credit strategies, and about 5% in real assets like property or gold. More than half of the assets are in the US.
Many trusts found that their discounts widened out before the Budget, partly on fears of higher capital gains tax, but Maggie hopes this will have been a “clearing event” that draws a line under this selling. The trust has also suffered from the cost disclosure problem, where the trust had to declare overall costs of close to 5% under the old accounting standard, and that figure is now 0.77%, which has allowed the trust to be reinstated on the Fidelity dealing platform. Maggie expects the discount to narrow now, particularly as the trust is focusing more on its communications and transparency.
RCP sees itself as a wealth accumulation vehicle that can prosper over time with less volatility than the market. Historically the trust has achieved around 10.5% annual returns, but the marked underperformance in 2022 and 2023 has taken its toll and undermined confidence in the ability of the trust to maintain that record. To us, the trust seems fairly determined to move forward from here and to get past a cyclical downturn. The trust is buying back shares, and we think the discount stands a good chance of narrowing from here: along with quite a number of other trusts like Caledonia Investments (CLDN, 3320p, discount 39.4%) we think there is good embedded value that should reward patient investors over time.
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