Global giant RIT Capital (RCP ) is ready to prove its mettle as the ultimate investment trust diversifier as investors hunt for returns beyond the overheated US market.

The rotation out of US equities that started this year on fears of a tech bubble, high valuations, and fiscal and political uncertainty, could play into the strengths of the £4.3bn portfolio.

The trust, which was founded by legendary City financier Lord Jacob Rothschild in 1959 and listed in London in 1988, invests in three distinct tranches: quoted equities, private investments, and uncorrelated assets.

The strategy has been a drag on performance in recent years as a historic underweight to US large-caps meant it missed out on bumper gains from technology stocks riding the artificial intelligence (AI) boom.

Over the past three years, the net asset value (NAV) and share price have both lagged the wider AIC Flexible Investment sector. While the portfolio in value has grown 15.7% versus a 19.9% sector average, the shares only managed a 5.9% rise against a 21.6% average gain.

Maggie Fanari, who became chief executive of J Rothschild Capital Management and manager of RCP at the beginning of 2024, is confident that the broadening of returns will showcase what the all-weather fund can do.

Returns have already been improving against peers, and over one year the NAV is up 8.1% against a 9.1% average. The shares are ahead an impressive 17.7%, beating the average flexible investment trust’s 16.8% gain.

The fund still lags the MSCI All Country World index, which is one of two benchmarks it plots itself against, the other being Consumer Price Index (CPI) plus 3%, which it has beaten.

Fanari said her aim is to ‘compound returns for shareholders’, and although she said the strategy will not ‘capture as much upswing’ in markets, it aims to limit any falls.

However, she is insistent RCP is ‘not a wealth preservation trust’. ‘It aims for risk-adjusted returns with a focus on growth,’ she said.

It is not just the NAV that Fanari has her eye on, as she is keen to shrink the wide discount the fund has traded at. While it has narrowed slightly over recent months from a 12-year average of 27%, the fund is still trading at a 23% discount to NAV; a hangover from concerns about the valuation of its private holdings that blighted RCP and the wider private equity space.  

Fanari is ‘treating the discount and the NAV performance with the same amount of focus’ and said reducing the discount was a ‘key priority’ for the RCP team.

Strategy cross-over

Fanari is no stranger to this type of strategy having previously been in a leadership role at the highly-regarded Ontario Teachers’ Pension Plan, which is home to $269bn in assets.

‘In many ways it’s similar to OTPP in the way we think about risk and delivering returns. We take a multi-asset approach, capturing equity-like upside with lower risk.’

The cross-over in strategies of OTPP and RCP is how Fanari originally met the Rothschild team 15 years ago due to their ‘overlapping deal flow’.

‘How I got to know the [Rothschild] team was we were interested in the same investments,’ she said.

Fanari subsequently joined the RCP board in 2019 before becoming its manager at the start of 2024. The appointment was part of a wider shake-up of the investment team that included the departure of chief investment officer Nicholas Khuu after just five years. 

There have been a raft of hires at J Rothschild Capital Management, which is based in Grade II-listed Spencer House by Green Park, London. That includes Fanari’s former OTPP colleague Richard Lam, who joined as head of private funds, a newly-created role.

Fanari’s promotion to manager has not just brought in an expanded team but an enhanced transparency of the trust’s workings, with factsheets and its website now providing more information about investments, as well as weightings to subsectors, regions and currencies.

Unquoted fuel for growth

The greater disclosure in the private company tranche has been of great interest to investors, especially RCP’s investment in SpaceX in March.

Private companies have been a huge driver of returns in the first half of this year, with unquoted investments reporting NAV gains of 9% thanks to a flurry of realisations. This included exits from Scale AI, crypto-bank Xapo, and cybersecurity company Wiz.

Fanari said it was a ‘very active part of the portfolio’ and in 2022/23 it was ‘close to 45% of the balance sheet’. This is higher than the 25%-33% level it has been at historically, and therefore she was steadily reducing the size of the unquoted portfolio.

However, that does not mean she is not looking for new opportunities, with Fanari ‘still investing when our high bar is met’.

For now, she is focusing her ‘high conviction’ strategy on the private companies she does back, including payment processing group Stripe and electronic health record software provider Epic Systems, with the aim of bringing typically inaccessible companies to the masses.

The return of Donald Trump to the White House has been a boon to the private market, with ‘solid IPOs coming through’ thanks to deregulation, which should also boost the M&A market this year, creating an exciting transaction market for private bids.

To take advantage of this pick-up, Fanari said the trust must be invested in the right areas that are ripe for M&A, which for her are fintech and AI – the sectors that have already delivered solid realisations this year.

‘If you are in these themes and categories today you are seeing lot of activity and strong returns,’ she said.

‘But they have more to run and are long-run structural themes.’

Private companies that list are often moved into the quoted part of the portfolio, with RCP’s biggest success story in this regard being Coupang, which is considered the ‘Amazon of Korea’.

Webull, a financial services platform, also made the leap from private to quoted in April when it listed. In October, RCP exited the equity position ‘generating a cash return of approximately 2 times on the equity investment’.

Specialist stock pickers

However, Fanari prefers to use specialist fund managers to find opportunities in quoted markets. At the moment, she is backing Japan, where she uses a specialist that ‘focuses on corporate governance and the impact it will have on long-term earnings and shareholder appreciation’.

She is also backing a recovery in the beleaguered healthcare sector, that failed to recover from its post-Covid slump due to uncertainty around the US administration’s plans for the sector.

‘There are really strong green shoots in biotech. There is strong performance there and we believe in the healthcare sector,’ said Fanari, adding that it is ‘an excellent investment and we are seeing the rewards’.

The manager is also backing the long-awaited China recovery and has ‘been an investor since last year when valuations were cheap’.

Fanari was ahead of the rotation out of the US and into Europe.

‘After we saw the outcome of the US election, we started to think about European sovereignty,’ she said.

‘We thought it was likely that the US would pull back and that would require further investment in defence and infrastructure [in Europe], so we have been adding to our position.’

Fanari is unconcerned that her bias against the large and mega-cap US stocks has stunted performance, remaining confident that ‘private companies are driving that part of our growth, so we do not need to do that’ in quoted investments. 

Green shoots

The final part of the portfolio is the uncorrelated assets, such as gold, which has been a ‘very positive driver’ with a 4-5% exposure in the portfolio.

‘Real assets are a strong diversifier and help to mitigate for some of our dollar holdings,’ said Fanari.

Diversification is at the heart of what Fanari and her investment team of 20 do, and she believes it will become increasingly relevant to investors.

As the rotation out of US behemoths gains attention, she said ‘everyone is looking for diversification’.

‘Given the macro and geopolitical environment, there is a lot of change… The S&P was not the best performer this year and the US is not the only place to make money,’ she said.

‘People want diversification… I am excited to see absolute return strategies come back. It is a great time for hedge fund managers and we have some seen some really good performance from ours… There are solid green shoots.’