PERSONAL ACCOUNT

What Lord Rothschild has in common with ordinary investors

News this week of a possible merger between two widely held investment trusts – RIT Capital Partners and Alliance Trust – highlights how investors’ needs and tastes are changing.

Both trusts are large, multibillion pound companies listed on the London market and set up purely as investment vehicles for their respective shareholders. But there all similarity ends. On the one hand is £2.6bn Alliance Trust, a traditional fund that has been going since the year dot (1888, to be exact) and which invests mainly in large, global bluechip companies. Its approach has barely changed since the end of the Second World War.

On the other hand is RIT, also worth £2.6bn, which was set up by Jacob Rothschild in 1988 to protect and grow his vast personal fortune. This trust owns a wide range of assets including property and hedge funds and has lately been reducing exposure to shares.

In performance terms, the chalk and cheese persists.

Alliance’s performance has been poor for much of the past decade. Even Brewin Dolphin, the 250-yearold wealth manager that has been a long supporter of Alliance and owns a 3pc stake, has been rating it a sell/ underperform for years.

RIT’s performance by contrast has been exceptional and consistent, returning over 12pc per year since inception and beating Alliance’s returns over the past one, three and 10 years.

Then there is the issue of risk. Alliance might sound a straightforward proposition, but the risk it exposes shareholders to – as measured by the portfolio’s volatility – is far greater than at RIT.

When it comes to consistent returns within controlled risk parameters, RIT is the hands-down winner. Lord Rothschild, the chairman of RIT and owner of £453m of its stock, is focused on risk. An explicit aim of the trust is to “preserve shareholders’ capital”.

While this objective might seem obvious and basic, it is not met by traditional portfolios that invest only in shares – such as Alliance.

Richard Romer-Lee, director of investment research firm Square Mile, explained: “Incrementally, the more gains you make as an investor, the less excited you become about further gains – and the more concerned you become about your exposure to potential losses. “It’s human nature.” He believes a growing understanding of this need for a more sophisticated approach to risk, coupled with ageing investors who fear they have less time in which to recoup capital losses, has boosted the popularity of funds such as RIT.

Money is pouring into similar (if not quite so successful) portfolios that likewise seek to limit losses by investing across a range of assets. With the FTSE today trading well below the all-time peak it reached 16 years ago, investors fret that even long investment horizons are not enough to account for the vagaries of the market.

This too is pushing them more towards the risk-conscious approach of portfolios such as RIT, reckons Mr Romer-Lee.

Where does that leave Alliance? The talks are only at an early stage, and may fail. There would be many reasons to regret the disappearance of Alliance. But most ordinary shareholders might find they are better served with a more conservative investment style.

Jacob Rothschild with the Duchess of Cambridge last month: this event took place at Spencer House, the London mansion whose lease is owned by RIT