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Lord Rothschild alert to risks amid stock market highs

6 August 2019

Lord Rothschild uses last shareholder message as chairman of RIT Capital Partners to warn of risks to global stock markets.

Lord Rothschild has used his last shareholder message as chairman of RIT Capital (RCP) to warn of the vulnerability of stock markets to a decline in company profits amid global trade tensions and weakening growth.

Rothschild announced earlier this year he would step down as chairman and director of the defensive global trust in September.

Rothschild, 82, will become president of the trust he founded in 1988, with Sir James Leigh-Pemberton, who heads government agency UK Financial Investments, succeeding him as chair.

He used half-year results for the trust to warn of the risks to global stock markets trading at highs despite 'trade wars, the weakening of economic growth and the risk of recession'.

'Valuations are, on many metrics, at the upper end of historical ranges at a time when geopolitical risks abound; credit quality is deteriorating; and global economic growth is weakening,' he said.

'Of particular concern is whether the current high level of corporate profitability is sustainable,' he added.

'The last decade has seen a confluence of factors which have benefited companies' earnings to an unprecedented extent. Lower cost of capital, reduced taxes, stagnant wages and the influence of globalisation contributed to record profit margins. These positive factors are, however, unlikely to be sustained.'

Rothschild said RIT was 'cautiously positioned' with net equity exposure standing at 43% of the portfolio. These stocks delivered 

'Against this backdrop we are seeking to invest in situations that either give us a degree of protection in potentially deteriorating conditions or in areas where structural growth rates are sufficiently high for valuations to hold their own or indeed prosper,' he said.

RIT Capital has grown its net asset value (NAV) by 4.9% over the last 12 months, though its shares are down 2.2% as a premium to NAV  that has averaged 8.4% over the last year has narrowed to 3.9%.

Unquoted investments account for 26% of the RIT portfolio, with 14% of this exposure via third-party funds and 12% in direct holdings.

Recent unlisted additions to the trust include a $50 million (£41 million) investment in US logistics business KeepTruckin, now 1.3% of the portfolio.

The largest direct unquoted exposure is in Acorn Holdings via a co-investment alongside bank BDT Capital. Acorn, a 4% position, is the coffee and soft-drinks subsidiary of German conglomerate JAB Holdings.

JAB bought beverage Keurig Green Mountain in 2016 as part of a consortium of investors. Keurig Green Mountain then announced last year it was buying rival Dr Pepper Snapple, with JAB owning the majority of the combined companies.

RIT made a follow-on investment in Acorn in mid-2018 to support the merger of Keurig Green Mountain and Dr Pepper Snapple, now Keurig Dr Pepper (KDP.N).

The trust paid its first interim dividend of 2019 of 17p per share in April and has declared a second interim dividend of the same amount to be paid out in October. The total dividend of 34p for 2019 represents a 3% rise on 2018's payment.

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