Where RIT went wrong
Weak returns and rising private-equity exposure mean the wide discount is justified
Shares in RIT Capital Partners (LSE: RCP), the £4bn trust controlled by the Rothschild family, fell to a 16% discount to net asset value (NAV) following a negative write up in The Telegraph, sourced from a research note by Alan Brierley at Investec. Some are arguing that the shares are now compelling value as investment performance is likely to improve and so the discount will narrow or disappear. But buying trusts primarily because of a wide discount is not justified if the performance is poor and there is no evidence of an improvement.
A NAV return of 44% over five years is behind global indices (52%), although a little ahead over three (at 28%). Underperformance may be a price worth paying if it means a smoother ride. This is what Personal Assets (LSE: PNL), Ruffer (LSE: RICA) and Capital Gearing (LSE: CGT) offer, with five-year returns of 25%, 40% and 30% respectively, but one-year returns of -4%, 8% and -3%. Yet the 2022 NAV return of RIT was -11%, and the price fell -21%. The shares have since fallen further, even while markets have rallied.
RIT’s exposure to private equity, both direct and through funds, has risen to 45% compared with just 24% two years earlier, Brierley points out. Moreover, “while traditionally this portfolio has been balanced, there is now a significant tilt towards higher-risk venture capital, including around 4% in blockchain/crypto”. RIT does not disclose its full portfolio, but on 30 June the disclosed venture capital fund exposure alone was 18.5% of NAV, versus just 1% seven years earlier, he notes.
A false dawn in Korea
In mid-2021, it seemed that RIT’s record had been rescued by the flotation of Coupang, the Korean e-commerce firm that surged 40% on its March listing and accounted for 9% of the portfolio. The shares now trade 64% below the opening price, though there has been a partial recovery since last June. The price of stock trading platform Robinhood, in which RIT had invested £29m, has collapsed 84% since August 2021.
It is hard to imagine RIT under Jacob Rothschild, who previously ran the trust, investing in either Coupang or Robinhood. The team that took over from him (he left for good in 2019) are, perhaps, proving too clever for their own good. Two years ago, it seemed that they were managing well, but tougher market conditions have found them out.
Valuations in private markets may have further to fall, which would hold RIT’s performance back. By mid-2022, the Nasdaq was down 29.5% and the Goldman Sachs Unprofitable
Tech index was down 52%, yet Cambridge Associates’ US Venture Capital index was down just 12.5%, says Dan Rasmussen of Verdad Advisors. “This gap between private markets and public markets is the largest since the bursting of the dotcom bubble.”
A better-performing rival
Conversely, Caledonia Investments (LSE: CLDN), the £2.7bn trust controlled by the Cayzer family, trades on a discount to NAV of 27%, despite returns of 67%, 46% and 9% over five years, three years, and one year. Its rating has suffered from its 30% exposure to direct private equity and 32% to private-equity funds compared with just 29% in quoted equities and 9% in cash.
Caledonia says that its two financial services businesses, 7iM and Stonehage Fleming, “continue to perform well despite challenging market conditions”. The merger of Liberation – its pubs, hotels and drinks business – with Cirrus Inns was accompanied by additional investment by both Caledonia and Cirrus’ investors. The fund holdings returned 13.8% in the first nine months of 2022, with strong performance in North America, but mixed performance in Asia.
Existing investors in RIT may get a better selling opportunity. But new ones should consider Caledonia (for the bold), Ruffer or Personal Assets (for the cautious), or a combination.