(Update) RIT Capital Partners (RCP ) plans to cut private investments to between a quarter and a third of its £3.6bn portfolio in the next two years as it endeavours to win back investors and narrow its 26% share price discount.

Concern over the 35.9% RIT holds in private unlisted assets has driven the derating of the global multi-asset portfolio, whose shares last stood at a premium over net asset value (NAV) four years ago.

The investment trust’s 2023 annual report today shows that private investments fell 6% last year as the lagged reporting of fund valuations from the end of 2022 depressed returns.

The company said the decline followed exceptional gains in recent years with private equity funds and unlisted companies generating a 20% annual compound return for RIT in the past decade.

‘Candid’ talks

After ‘candid’ talks with a range of shareholders, the chair, James Leigh-Pemberton, said the proportion in illiquid, hard-to-value private investments would reduce to between 25% and 33% of NAV in the next two years.

He said the fund managers would exit investments and set a ‘very high return bar’ for any new investments in the area.

RIT’s allocation to private equity has risen on the back of big gains in holdings such as US fleet management software provider Motive and fintech Brex, as well as a quiet flotation market that has prevented exit opportunities through initial public offers (IPOs).

With ‘several large holdings actively exploring IPOs’, such as the 1.4% position in trading platform Webull announcing plans to list on Nasdaq, the company said the proportion in private equity would naturally fall.

Leigh-Pemberton emphasised this would be an orderly retreat, not a fire sale. ‘What we will not do is accelerate exits or engage in sales at discounts to fair value to the detriment of long-term shareholder value,’ he said.

Crucially, proceeds from private equity sales would either be deployed in share buybacks or re-invested in liquid, listed stocks whose valuations are tested in daily trading.

Discount damaged returns

RIT held 38.4% in quoted equities at 31 December having reaped a ‘strong’ 18.1% return in 2023. With the remaining 25.6% in ‘uncorrelated’ assets such as credit funds returning 6.8%, the multi-asset fund generated a modest 3.2% underlying investment return with NAV per share of £24.26 at 31 December.

That underperformed the 18.4% return from the MSCI All Country World index, an 17.8% advance in the US S&P 500 (which was actually 26.3% in dollars) and an 8% return from the UK’s ‘mid-cap’ FTSE 250 index in which RIT resides. It also failed to keep up with the inflation plus 3% benchmark the fund also measures itself against, which rose 7%.

Trailing the first two benchmarks was largely the result of not holding the mega-cap ‘Magnificent Seven’ tech stocks that dominated markets last year, which is a feature of many actively managed funds. RIT’s low 39% in public equities didn’t help, though its stock picks in Japan and Builder FirstSource and Talen Energy in the US did well, but were partly offset by the fund’s holdings in China.

However, in RIT’s case, shareholders lost 9.6% as the gap, or discount, between the share price and the portfolio’s asset value doubled to 22.4%. That reflected concerns across the investment company market as well as disenchantment with RIT which at the end of last year parted company with its fund manager’s chief investment officer and chief executive due to changes in their personal circumstances.

Last week the death of Lord Rothschild deprived RIC of its honorary president and former founding chairman.

‘Hats-off’ for buybacks

The company responded to the share price slump by spending £163m on buying back its stock as it grew cheaper last year, adding 1.2% to NAV per share. Leigh-Pemberton said the board was ‘acutely focused on closing the discount’ and ensuring shareholders got the underlying return achieved by J Rothschild Capital Management which had more than doubled asset value in the past 10 years.  

Mick Gilligan, head of managed portoflios at Killik & Co, a previous critic of RIT, said the board deserved ‘a big “hats-off” for the impact of the buyback bazooka they unleashed during the year’.

‘However, more needs to be done on the cost front if the trust wishes to reassert itself a viable offering to wealth managers,’ he added. Ongoing charges dipped from 1.8% to 1.7% last year, which Gilligan said was too high, particularly when performance was struggling.

Stifel analyst Iain Scouller maintained a ‘positive rating’ on RIT believing the share price discount could narrow by at least 10 percentage points if investors saw RIT crystallising gains on unlisted companies and private equity funds reported end of 2023 valuations that avoided sharp ‘cliff-edge’ reductions.

Chief investment officer Nick Khuu, who replaced Ron Tabbouche last year, said RIT was navigating a shifting landscape – ‘while US GDP estimates are trending upward, certain credit indicators are exhibiting signs of decline’ – overshadowed by the conflicts in Ukraine and the Middle East and potential repercussions from the US presidential election in November.

Nevertheless, Khuu said he was excited by investment opportunities in equities, particularly smaller and mid-sized companies, and in corporate credit, where a retreat by banks and a wall of maturing loans provided an opening for alternative lenders. 

If his enthusiam is rewarded, RIT’s share price might look different in a year’s time but today, with the shares up 0.5% to £17.79, the market is waiting to be convinced.