Wealth preservation trust can be rehabilitated after the worst slump in its 36-year history

RIT Capital Partners board’s increased focus on improving shareholder returns combined with a programme to cut costs could pay dividends as capital markets reopen and more firms float on stock exchanges

Questor has reversed its “sell” recommendation on RIT Capital Partners following full-year results showing the Rothschild-backed investment trust pulling through the worst slump in its 36-year history.

RIT’S 2023 annual report last month showed the £3.6bn global portfolio disappointed last year. A 3.2pc rise in assets trailed the 18.4pc return from the MSCI All Country World index and the 7pc rise in the inflation benchmark it also uses.

The report made sobering reading for long-term shareholders. While the company’s underlying investment return of 3,343pc since listing in 1988 has smashed both benchmarks, which have gained 1,607pc and 637pc respectively, performance has dropped off alarmingly in the past decade.

The value of its diverse investments has lagged the MSCI index over three, five and 10 years, and over three years has fallen well behind its annual target of delivering at least three percentage points more than the consumer price index. Shareholder returns have been far worse. From the top of the market in November 2021, the shares have slumped 36pc, largely over concern about the 45pc exposure to riskier unquoted assets held by 2022.

At £17.86, the shares have fallen 19pc since we dropped our “buy” rating on Jan 5 last year. That puts them 28pc below the net asset value of its holdings in publicly listed shares, private assets and other “uncorrelated” investments. The discount, or gap, between the share price and asset value has nearly trebled from 11pc since this column turned bearish, and is a big factor in upgrading our recommendation. While uncertainties remain, such as whether RIT’S fund manager, J Rothschild Capital Management, can turn performance around under Maggie Fanari, the new chief executive, we believe these are reflected in the low share price.

Despite last year’s modest return, the results provided reassurance. In quoted equities, where RIT had 38.4pc invested in December, the trust reaped an 18.1pc return. That was in line with the MSCI benchmark, a good result given it held virtually none of the “magnificent seven” US technology giants that dominated global markets.

More importantly, the investments in private equity funds and unlisted companies that had so alarmed us fell 6pc, less than feared. While stagflation and a consumer spending squeeze hurt some holdings, losses were mostly offset by strong growth elsewhere and higher valuations to tech firms enjoying the boom in artificial intelligence. Following “candid” talks with shareholders, the chairman James Leigh-pemberton said the amount held in the more illiquid and opaque private investments would lower to 25pc to 33pc in the next two years. There will be no fire sale, he said, but a gradual reduction as capital markets reopen and more companies float on stock exchanges, enabling RIT to make an exit. Several of its investments, such as Webull, the US stock trading platform, a 1.4pc position, are “actively exploring” initial public offerings.

RIT’S private assets had generated average annual returns of 20pc in the past 10 years, more than double the MSCI index. Best of all, RIT has been buying back shares, spending £184m on its cheap stock in the past 15 months. That shows the board’s conviction in the valuation of its assets and a belief shares are undervalued.

That has impressed Alan Brierley, an Investec analyst, who has lifted RIT to “hold” from a “sell” rating. While still wary about private equity, he believes Fanari, a former senior fund manager at the renowned Ontario Teachers’ Pension Plan, will bring “more institutional discipline and vigour”.

Mick Gilligan of the wealth manager Killik & Co applauded the buybacks for “putting a floor under the discount” that he said implied RIT’S private equities were undervalued by up to 50pc. “This is much wider than most private equity trusts and offers an excellent margin of safety,” he said.

Both said RIT must do more to cut costs, which, with fees of external funds included, amounted to 1.71pc last year, nearly double the 0.9pc average of listed global equity funds. Questor agrees cutting expenses is essential for RIT’S rehabilitation. Nevertheless, the shares are good value and with RIT focused on improving shareholder returns, we are happy to reinstate our previous recommendation.

Questor says: buy Ticker: RCP

Share price at close: £17.86

‘While stagflation and a consumer squeeze hurt some holdings, losses were offset by growth elsewhere’