Wealth manager Killik has urged RIT Capital Partners (RCP ) to hike share buybacks as the Rothschild-backed multi-asset fund trades on an almost unprecedented 21% discount below net asset value (NAV).

Annual results today showed the £3.8bn investment company, which is 41% owned by the Rothschild family, spent just £11m buying back its shares last year, although that was a sharp increase from £1.4m in 2021. Share buybacks are commonly used when investor demand collapses leading to the sort of de-rating RIT has suffered.

Commenting on the figures, Mick Gilligan, head of managed portfolio services at Killik, said RIT Capital’s low share price rating reflected investors’ scepticism over the reliability of its private equity valuations.

While that was an issue facing all private equity funds, Gilligan said it could be easily addressed by the board showing its faith in the trust’s NAV by buying back shares at their current levels.

Gilligan (above) also took aim at the trust’s high annual charges of 1.8%, which he said can reach ‘eyewatering’ levels when performance fees are included. That wasn’t an issue last year when the NAV slumped more than 13% and the share price crashed 21.5%, a poor outcome for a fund that positions itself as a steady, risk-reduction vehicle.

Despite that disappointment, Gilligan believed RIT Capital with its well-connected portfolio managers at J Rothschild Capital Management offered a useful strategy in uncertain markets.

But he added: ‘I hope to see the board put their buying boots on now and enact some buybacks. RIT is one we continue to hold but we temper our enthusiasm, given the high cost-base, via modest position sizes.’

Poor shareholder returns

In the report, the trust’s chair Sir James Leigh-Pemberton expressed discomfort at RIT’s slump and inability to shield investors from the most difficult year for markets in more than a decade. He promised a 2.7% rise in dividends this year to a total of 38p per share.

However, he defended the trust’s longer-term record, pointing out that its underlying growth in NAV of 24.8% over three years to the end of December had beaten global stock markets with the MSCI All Country World index (ACWI) up 17.7%.

Over five years, a 40.9% return on net assets exceeded the MSCI ACWI’s 35.5% advance and beat its other target of offering a real annual return of 3% over the consumer price index. CPI+3% offered a 39.7% hurdle over five years which it had cleared, Leigh-Pemberton said.

A former investment banker who previously oversaw the taxpayers’ stakes in bailed-out Royal Bank of Scotland and Lloyds, Leigh-Pemberton added that since launch in 1988 to the end of last year RIT Capital Partners had generated an average annual total return to shareholders of 11.2% that beat the global markets return of 7%.

However, that overlooks the fact that during shorter-time periods shareholder returns have been far worse than the portfolio’s underlying NAV returns. With the shares trailing on a widening discount, as of yesterday shareholders had seen a return of just 3% and 6.7% over three and five years.

Other than revealing that the board repurchased 514,634 shares last year and kept them in treasury where there are now 689,863 shares that could be reissued at a later date, there was no other comment by the company on buybacks.

Numis Securities, one of RIT’s corporate brokers, did hold out the prospect of more buybacks now that the company was out of its close period. Its last in a flurry of second-half repurchases was before Christmas at £19.98. The shares stand at £19.38, up 0.8% or 16p today.

Private equity has delivered

RIT Capital did reveal more details of its investments and in particular the 40.7% held in private equity, split 11.9% in direct investments in private companies and 28.8% in private equity funds.

That side of the portfolio has increased from 24% two years ago, prompting Investec analysts to downgrade their long-standing ‘buy’ to ‘hold’ in December on account of the rising risk of write-downs.

That prompted the Telegraph to dump its tip of the trust in January, recommending readers ‘sell’ and causing a 10% one-day drop in the shares.

Leigh-Pemberton revealed that the private equity holdings had knocked 6% off NAV last year. Over three years, however, they had added around 26% to asset value and generated £500m of distributions, he said.

RIT’s most successful private equity stake in Coupang, the South Korean e-commerce company, had added 7% to NAV, the company said.  

The chair emphasised that RIT’s independent valuation committee had spent a lot of time ensuring the private investments were ‘marked at levels which reflect both changes in market conditions and underlying operating performance’.

Managers keep truckin’

Fund managers Francesco Goedhuis and Ron Tabbouche (above) said most of the private equity writedowns were driven by the fall in public markets, but said these had been partly offset by strong performance from many of the unquoted companies.

‘For example, Motive (previously called KeepTruckin’) continues to deliver strong recurring revenue growth, and raised $150m in new equity during 2022 at a 20% higher valuation to the previous funding round, one year earlier,’ they said.

‘We remain confident about the future prospects for this book, which is diversified across a range of industry sectors, and with businesses at different stages of maturity. For example, the majority of our top 10 holdings are profitable, and additionally, the majority of the book’s investments also benefit from a degree of structural protection,’ they concluded.

Risk levels had also been addressed with the higher allocation to a digital transition theme in the private equity holdings offset by a more ‘pessimistic’ reduction in quoted equities where the pair tilted towards ‘value’ away from ‘growth’ after the surge in interest rates and inflation.

Quoted equities fell 6.7% and accounted for 35.1% of assets in December down from 42.6% the year before, although the managers remain keen on biotechnology and Japan.

Investments in absolute return and credit were stable and stood at 20.1% of the fund, up from 17.7% a year earlier.

Now communicating

Numis analyst Ewan Lovett-Turner said investors were ‘understandably questioning the defensive nature’ of RIT Capital. He said the company had not pitched itself as an ‘absolute return’ fund delivering positive returns in all markets and still had the potential to deliver the more resilient performance they expected.

He believed the increased disclosure on the private equity holdings was reassuring, particularly as public markets had advanced since the last valuation of unquoteds in September and December.

Lovett-Turner predicted an ‘acceleration’ in investor communication as the previously tight-lipped RIT sought to re-rate its stock and reiterated his view that the wide discount offered a good chance to buy a manager with a strong long-term record.