The RIT Capital Partners investment trust has slashed its exposure to equities in the expectation that the turbulent conditions that blighted markets in 2015 could intensify over the coming 12 months, with its chairman Lord Rothschild warning that the global economy could be “in the eye of a storm”.
During 2015, the FTSE All Share rose 0.98 per cent in total return terms while the MSCI AC World index was up 3.29 per cent – but as the graph below shows, these small gains only came about after a volatile summer which saw many indices tumble from record highs. The Barclays Sterling Gilts index gained 0.49 per cent over the year.
However, the £2.5bn RIT Capital Partners trust posted a 22.69 per cent total return in 2015 and made a net asset value per share return of 8.1 per cent. This means it was the highest returning member of the AIC’s new Flexible Investment sector, which has 11 members.
Performance of trust vs indices over 2015
Source: FE Analytics
In the trust’s annual report, Lord Rothschild said 2015 had been a “satisfactory year” for the trust’s investors but reiterated the note of caution sounded in his half-yearly statement in August, when he warned that “the climate is one where the wind may well not be behind us”.
“Indeed we became increasingly concerned about global equity markets during the last quarter of 2015, reducing our exposure to equities as the economic outlook darkened and many companies reported disappointing earnings,” he said in the latest report.
“Meanwhile central banks’ policymakers became more pessimistic in their economic forecasts for, despite unprecedented monetary stimulus, growth remained anaemic. Not surprisingly, market conditions have deteriorated further. So much so that the wind is certainly not behind us; indeed we may well be in the eye of a storm.”
“Our view is that 2016 is likely to turn out to be more difficult than the second half of 2015. Our policy will be towards a greater emphasis on seeking absolute returns.”
RIT Capital Partners, which has the dual aim of protecting and increasing shareholders’ wealth over the long term, invests in a blend of individual stocks, private investments, equity funds and currency positioning.
Concern over the state of the global economy and markets has led its overall quoted equity exposure to be brought down to 43 per cent of its net asset value; this is a significant reduction from the 63 per cent weighting held at the end of 2015. Exposure to private investments has been lifted slightly from 23 per cent to 26 per cent.
The portfolio is increasing exposure to absolute return and credit strategies. It is making a “meaningful” new investment with Eisler Capital, which runs a global macro fund that targets positive returns over the market cycle with a focus on capital preservation.
Explaining why the trust has cut its quoted equities and is looking to absolute return, Lord Rothschild said: “The litany of problems which confronts investors is daunting: the QE tap is in the course of being turned off and in any event its impact in stimulating asset prices is coming to an end. There’s the slowing down to an unknown extent in China. The situation in the Middle East is likely to be unresolvable at least for some time ahead. Progress of the US and European economies is disappointing. The Greek situation remains fraught with the country now having to cope with the challenge of unprecedented immigration.”
“Over the last few years we have witnessed an explosion in debt, much of it repayable in revalued dollars by emerging market countries at the time of a collapse in commodity prices. Countries like Brazil, Russia, Nigeria, Ukraine and Kazakhstan are, as a result, deeply troubled.”
“In the UK we have an unsettled political situation as we attempt to deal with the possibility of Brexit in the coming months. The risks that confront investors are clearly considerable at a time when stock market valuations remain relatively high.”
RIT Capital Partners’ aim of growing wealth while keeping a close eye on capital preservation has paid off for its investors over the long run. Since the start of 1999, which is as far back as our data on the vehicle goes, it has made a 465.08 per cent total return – compared with a 126.59 per cent rise in its MSCI AC World benchmark.
Performance of trust vs index since 1999
Source: FE Analytics
Since the trust listed in 1988, it has participated in 76 per cent of the market upside but only 39 per cent of its declines, according to its own figures.
FE Analytics shows that its annualised volatility has been just under that of the MSCI AC World at 14.63 per cent while its maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – was 31.53 per cent, against the index’s 48.79 per cent.
RIT Capital Partners is trading on a 1.9 per cent premium to net asset value, yields 1.9 per cent and is 12 per cent geared. The trust has ongoing charges, including a performance fee, of 1.258 per cent.
