Questions have been raised over RIT Capital’s (RCP) capital preservation credentials of late thanks to its exposure to private investments. The shares have notably underperformed those of rival trusts and the discount to NAV (net asset value) has    widened significantly.

In this article we look at whether the criticism and discount is warranted and consider the recent underperformance of the trust in the context of its longer-term track record.

RIT is a multi-asset portfolio that invests in credit, macro strategies and real assets. However, it also aims to deliver long-term capital growth through the purchase of risk assets including equities and private companies, both directly and through funds. This material exposure to risk assets does distinguish it somewhat from its capital preservation peers.

WHAT’S GONE WRONG FOR RIT CAPITAL?

In research published earlier this year analysts at Investec noted: ‘A key driver of the fall in NAV in 2022 was the private investment exposure. While this made an exceptional NAV total contribution of circa 34% in 2020 and 2021, some of these gains were given back last year. The full year contribution was -6.2% with valuations coming under increasing pressure in the second half.

‘We believe that the risk profile has been radically transformed, and that RIT Capital now faces an uphill challenge to convince investors it should still be regarded as a low-risk cornerstone investment.’

Though they are very different trusts with very different mandates, some parallels can be drawn between RIT Capital and Scottish Mortgage Trust in relation to exposure to private investments and ongoing performance.

Earlier in the year managers of Scottish Mortgage Trust (SMT) – Tom Slater and Lawrence Burns – faced criticism from shareholders and the board at Scottish Mortgage about the trust’s exposure to private companies which stood at 28.6% as of 31 March 2023. A key issue with unquoted holdings is they have less transparency in terms of their valuation.

At the time, Scottish Mortgage Trust’s managers reassured shareholders that this exposure would not reach 30% or above, but this reassurance came too late for the trust’s share price.

RIT Capital has 28% in private (funds) investments and 12% in direct private investments (as of 30 June 2023).

However, the trust doesn’t see its private investments portfolio as a problem but as part of their main objective to ‘deliver long-term capital growth, while preserving shareholders’ capital’. 

RIT Capital maintains that as it holds private companies over several decades, for example, the Economist and Paypoint (PAY), they still fit with its long-term targets.

LOOKING AT THE BIGGER PICTURE

If we look at RIT Capital’s performance over three, five and 10 years, we get more of a balanced view of its showing.

The trust has delivered substantial NAV per share total returns of 29%, 36.8% and 108.1% over three, five and 10 years respectively. The poor performance for the shares of late though means the share price total returns are more moderate at 4.8%, -0.2% and 83.7% respectively. Though this 10-year figure is still significantly better than its rival capital preservation trusts.

The recent underperformance of the wider market, if not its immediate peer group, can partly be explained by its lack of weighting to some big technology stocks which have driven performance in the first part of the year.

US tech giant Apple (APPL:NASDAQ) jumped 50% surpassing the $3 trillion market cap mark, while Meta (META:NASDAQ) and Tesla (TSLA:NASDAQ) more than doubled. Chipmaker Nvidia (NVDA) rallied 190% in the first half of the year.

‘Stripping out the few mega-cap technology stocks from the S&P 500, the remaining stocks averaged around 6%. Our quoted equity book returned almost 7% in the first half, contributing 2.6% to NAV,’ said the trust.

WHAT STEPS IS RIT CAPITAL TAKING?

The board says it is ‘enhancing’ its ‘communication efforts to provide a more frequent and more detailed flow of information [to shareholders]’.

The trust has also acknowledged the issue of a widening discount with its board and initiated a plan of share buybacks.

Over the six-month period to 30 June 2023 RIT Capital bought back 5.6 million shares at a cost of £105 million to ‘lock in the accretive benefit for shareholders’.

Nick Khuu has also been promoted to co-chief investment officer which it is hoped will provide a long-term benefit.

The trust says: ‘Nick is a very experienced investor who has been instrumental in the management of both our quoted equities and uncorrelated strategies.’

In the future, the trust is looking to invest in themes like US mid-caps, Japan, healthcare European credit, digital economy, and digital transition.

‘We are holding healthy liquidity balances as we believe these are fertile markets for deploying long-term capital,’ the trust adds.

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