RIT Capital / Rothschild "The litany of problems which confronts investors is daunting"VW Staff
RIT Capital Partners report and accounts for the year ended December 31, 2015.
RIT Capital Partners Highlights
To deliver long-term capital growth, while preserving shareholders’ capital; to invest without the constraints of a formal benchmark, but to deliver for shareholders increases in capital value in excess of the relevant indices over time.
To invest in a widely diversified, international portfolio across a range of asset classes, both quoted and unquoted; to allocate part of the portfolio to exceptional managers in order to ensure access to the best external talent available.
RIT Capital Partners – Chairman’s Statement
I am pleased to report that 2015 has been a satisfactory year for your Company with a share price total return of 22.7% and a net asset value per share return of 8.1%. The results in large measure reflect the investment management and operating skills of your Company’s wholly-owned subsidiary, J. Rothschild Capital Management (JRCM), under the excellent leadership of Francesco Goedhuis, well supported by the management team of Ron Tabbouche (CIO), Andrew Jones (CFO) and Jonathan Kestenbaum (COO).
In my half-yearly statement I sounded a note of caution, ending up by writing that “the climate is one where the wind may well not be behind us”; indeed we became increasingly concerned about global equity markets during the last quarter of 2015, reducing our exposure to equities as the economic outlook darkened and many companies reported disappointing earnings. Meanwhile central banks’ policy makers became more pessimistic in their economic forecasts for, despite unprecedented monetary stimulus, growth remained anaemic. Not surprisingly, market conditions have deteriorated further. So much so that the wind is certainly not behind us; indeed we may well be in the eye of a storm.
The litany of problems which confronts investors is daunting: the QE tap is in the course of being turned off and in any event its impact in stimulating asset prices is coming to an end. There’s the slowing down to an unknown extent in China. The situation in the Middle East is likely to be unresolvable at least for some time ahead. Progress of the US and European economies is disappointing. The Greek situation remains fraught with the country now having to cope with the challenge of unprecedented immigration. Over the last few years we have witnessed an explosion in debt, much of it repayable in revalued dollars by emerging market countries at the time of a collapse in commodity prices. Countries like Brazil, Russia, Nigeria, Ukraine and Kazakhstan are, as a result, deeply troubled. In the UK we have an unsettled political situation as we attempt to deal with the possibility of Brexit in the coming months. The risks that confront investors are clearly considerable at a time when stock market valuations remain relatively high.
There are, however, some influential and thoughtful investment managers who remain sanguine about markets in 2016 on the grounds that the US economy is in decent shape – outside of manufacturing – while they feel that economic conditions may be improving. To them, the decline in these markets may have more to do with sentiment than substance. Others are less optimistic but feel that the odds remain against these potential difficulties materialising in a form which would undermine global equity markets. However our view is that 2016 is likely to turn out to be more difficult than the second half of 2015. Our policy will be towards a greater emphasis on seeking absolute returns. We will remain highly selective when considering public and private investment opportunities. Reflecting this policy, our quoted equity exposure has been reduced to 43% of net asset value with private investments at 26%. To take advantage of low interest rates, in June 2015, your Company borrowed an amount of £151 million through the issue of fixed rate notes for between ten and twenty years, at a weighted average interest rate of 3.5%.
On investments, as always, the two pillars on which success depends are intelligent and correct forecasting of the macroeconomic situation, combined with the analysis of specific companies and stock selection; but in today’s difficult conditions we will put a greater emphasis on creating value by searching out opportunities in dislocated credit situations, currency fluctuations and merger arbitrage. In this context we also look forward to working closely with Ed Eisler of Eisler Capital, in which we are making an important investment. Ed had a distinguished career at Goldman Sachs where he was Global co-Head of the Securities Division and also a member of the firm’s Management and Risk Committees. His fund, with its focus on global macro investment opportunities, has been established to target returns over the cycle, with a capital preservation focus. Ed has now joined JRCM’s Investment Committee. In turbulent and volatile conditions, these skills could be of particular relevance and value.
There’s an old saying that in difficult times the return of capital takes precedence over the return on capital. Our principle will therefore be to exercise caution in all things in the current year, while remaining agile where opportunities present themselves. Problems have a habit of creating opportunities and I remain confident of our ability to identify and profit from them during 2016.
We are intending to pay a dividend of 31 pence per share in 2016, an increase above the current rate of inflation. This will be paid in two equal payments of 15.5 pence in April and October. We intend to maintain or increase this level in the years ahead, subject to unforeseen circumstances.
Your Company’s Board
After serving six years, Lord Myners is not standing for re-election to your Company’s Board. We’re deeply grateful to him for the investment intelligence and insights he has contributed to the affairs of your Company.
RIT Capital Partners Strategy & Business Model
This section aims to provide a clear and succinct overview of our strategy and business model, in particular:
- what we are trying to achieve (Strategic Aims);
- how we go about it (Investment Approach);
- how well we have done (Measuring Performance and KPIs);
- how we structure our remuneration (Incentive Structure); and
- our Governance and Group Structure.
Our strategic aims are best illustrated by our Corporate Objective:
“to deliver long-term capital growth, while preserving shareholders’ capital; to invest without the constraints of a formal benchmark, but to deliver for shareholders increases in capital value in excess of the relevant indices over time.”
We believe this accurately reflects our long-term aim. However a degree of clarification may assist shareholders in understanding what we are trying to achieve for them over time – in particular because we differ from many other large trusts who always aim to be fully invested in quoted equities.
The most important objective is long-term capital growth while preserving shareholders’ capital. The essence of our investing DNA is about protecting and enhancing shareholders’ wealth.
There may be times when we will deliberately place protection of shareholders’ funds ahead of growth – as happened during the latter stages of the dot-com era and also in the run up to the most recent financial crisis. However we recognise that such ‘market timing’ is unlikely to be sustainable in the long term.
We believe that our active management of equity exposure, combined with early identification of opportunities and themes across asset classes, is more likely to lead to long-term outperformance. We would hope to display healthy participation in up markets, and reasonable protection in down markets. Over time, this should allow us to compound ahead of markets throughout the cycles.
Indeed, since your Company’s listing in 1988, we have participated in 76% of the market upside but only 39% of the market declines. This has resulted in our NAV per share total return compounding at 11.4% per annum; a meaningful outperformance of global equity markets. Over the same period the total return to shareholders was 12.8% per annum.
The strategic aims are expressed in more practical terms in our Investment Policy:
“to invest in a widely diversified, international portfolio across a range of asset classes, both quoted and unquoted; to allocate part of the portfolio to exceptional managers in order to ensure access to the best external talent available.”
It is this policy which guides us as we manage your portfolio. So, while we retain at our core an equity bias, we nonetheless have the freedom to invest your portfolio across multiple asset classes, geographies, industries and currencies. This has been the basis of our style over many years – combining thematic investing with individual securities, and private investments with public stocks. The long-term success of your Company has been drawn from a distinctive blend of individual stocks, private investments, equity funds and currency positioning, all overlaid with macro exposure management. Indeed, it is this diversified approach that led the Association of Investment Companies (AIC) to transfer RIT Capital Partners into its newly created ‘Flexible Investment’ sector at the beginning of 2016.
We believe the extent of our global reach and network of contacts allows us to maximise our ability to deploy capital effectively. We seek to capitalise on an optimal blend of an in-house investment team working closely with our core external managers, the majority of whom are closed to new investors.
Above all, our approach is long term. For example, in relation to private investments, we are not constrained by the typical industry model of a limited life partnership. This means we can hold such investments over an extended period and choose to realise at an optimum time. On quoted investments, we aim to avoid being forced sellers of stocks if we are comfortable with their underlying fundamentals, even if it means incurring short-term losses.
Measuring Performance and KPIs
While we believe our success can only really be measured over the long term, we also recognize that providing shareholders with a comparator against which to measure our performance over shorter periods is important.
The strategic aims highlighted on the previous page, reflect the desire to produce real capital growth and to exceed markets. We therefore have established the following targets or Key Performance Indicators (KPIs):
- Absolute Outperformance: NAV total return in excess of RPI plus 3% per annum;
- Relative Outperformance: NAV total return in excess of the ACWI; and
- Share price total return or Total Shareholder Return (TSR).
he first of these KPIs reflects the desire to produce strong absolute returns with a meaningful premium above inflation.
The second reflects our unconstrained global investment approach and the desire to outperform markets. Consistent with many investment companies, we use the ACWI which we believe is an appropriate comparator for our global, unconstrained approach. On currency we use a blended index consisting of 50% of the ACWI measured in Sterling and 50% of the ACWI measured in local currencies. However, we also retain the flexibility to take an unconstrained approach to our currency positioning; for example in early 2008 we had no exposure to Sterling ahead of its significant fall in value later that year.
Our subsidiary, JRCM, is tasked with managing the portfolio to deliver a NAV return. Ultimately however, the return to our shareholders is through share price growth and dividends. We therefore also consider the TSR as our third KPI.
We were pleased with our performance in 2015. The NAV total return ended the year at 8.1%. This compared to our first KPI (RPI plus 3%) at 4.2% for the year, an outperformance of 3.9% points. We also exceeded the relative benchmark (the ACWI), which returned 2.3% over the year, an outperformance of 5.8% points.
At the same time, as a result of the significant change in our rating from a discount of 5.8% to a premium of 6.9%, the TSR over the year (our third KPI) reached 22.7%.
Our Remuneration Committee has sought to ensure that there is an appropriate incentive structure across the Group to attract, motivate and retain the high quality individuals we need to deliver our long-term strategic aims. The remuneration policy is designed to align with, and reinforce, these strategic aims.
The Chairman of RIT Capital Partners, as well as management and key staff of JRCM, participate in two principal plans:
- The Annual Incentive Scheme (AIS); and
- Long-Term Incentive Plan (LTIP).
The AIS is designed to incentivise staff through a share in the total NAV outperformance of the Absolute Outperformance hurdle and the Relative Outperformance hurdle. This is measured annually and includes longer term features such as a three-year ‘high water mark’ as well as significant deferral into RIT Capital Partners shares. In addition to this formulaic pool, AIS awards are also made for individual performance against qualitative measures. The Remuneration Committee retains the ability to clawback elements of previous awards if necessary. Payments under this scheme are capped at 0.75% of NAV or 0.25% if the NAV has declined.
There is also an LTIP which provides a longer term incentive of up to 10 years using Share Appreciation Rights (SARs), which vest if RIT Capital Partners’ TSR is above the hurdle of RPI plus 3.0% per annum over three years.
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