RIT Capital Partners: how the Rothschild’s trust invests

interactive investor's Sam Benstead sits down with Maggie Fanari, who is manager of RIT Capital Partners Ord (LSE:RCP), the popular capital protection and growth fund.

Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Maggie Fanari, who is CEO of J. Rothschild Capital Management, which manages the RIT Capital Partners Investment Trust. Maggie, thank you very much for coming into the studio.  

Maggie Fanari, CEO at  J. Rothschild Capital Partners: Thank you, Sam. I'm delighted to be here.  

Sam Benstead: RIT Capital Partners is known as a wealth preservation investment trust. Is that assessment of it fair?  

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Maggie Fanari: The way we think about investment is really looking to compound wealth for our shareholders over time. And we do that through both a diversified portfolio that's also global. So if we think about our returns for shareholders since inception, if you had invested £10,000 in, that would be worth £350,000 today. And we're able to do that because we're able to invest in both public assets, private assets as well as credit strategies and so on. But the secret sauce of how we're able to generate the is because of the relationships that we've built over multiple decades with managers around the world where many of those funds are closed to new investors. Now, we've often been compared to Caledonia or Scottish Mortgage or Ruffer, but we're quite different from that perspective really. If one thinks about putting RIT in their portfolio should be viewed as a core diversifier, something that gives you a better risk adjusted return than if you just put your money in a pure private equity option or in a pure passive ETF as an example.  

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Sam Benstead: So who would be your typical investor then?  

Maggie Fanari: So our investors again are very long term in nature, it would be an investor who's looking to get exposure to equity markets but not looking to take as much risk as the equity markets. It's someone who's looking to get exposure to private assets with some of the world's top quartile money managers and also looking to get a more global asset allocation into their into their portfolios. And the reason why I say they should be long term as well is because we have more illiquid strategies like private equity. As you know, if you were to invest in a standalone private equity fund, they would ask you to sign up for at least seven to 10 years, as that's how long it can take to go through a private equity cycle. Now through RIT you have to apply that same approach because we have we have the opportunity to invest with those managers.  

Sam Benstead: And what's the typical breakdown then of the different types of assets in your portfolio?  

Maggie Fanari: So in terms of and we spend a lot of time thinking about this in terms of our portfolio allocation. So the way we think about that is in three pillars. The first being quoted equities, which can be anywhere from 30 to 60% of our portfolio depending on our views and our outlook today, that's roughly just a little bit over 40%. And then we have exposure to private assets and that's about  35%, 36% of our portfolio. And then the remainder is in what we call uncorrelated strategies. So strategies like credit, which are less correlated to equity markets, which helps from a diversification perspective.  

Sam Benstead: So let's start with the quoted equity side of the portfolio then. What do you look for in the companies you buy and how do you access those companies?  

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Maggie Fanari: Thank you, Sam. That's a great question. And it goes back to how we invest RIT, which is very much a partnership driven approach. So we look to identify in our own opinion, what are the best managers in the world. And then we'll also look to find the most high conviction, most compelling opportunities that we see both identify through our very talented internal team as well as what we're seeing across our managers. And then we'll also look to make some of those investments directly. But we really think about it in a couple of different ways, which is when we invest directly. So as an example, for Japan or healthcare, we really do that through top managers in the world because the expertise that they bring and the 30 or 40 people they have behind them who have PhDs in example, that's not something we're going to replicate. But we can give investors access to global healthcare with those managers whose funds are often closed to new investors. But we will make direct investments our balance sheet.  

So this year we added a couple of names like National Grid, which we entered at a very strong entry price, which gave us a strong margin of safety. And then we invested in another company called KBR with one of our specialist managers. It's a US services and engineering company. We thought there was strong downside protection because they have contracts with the US government, but then they have a lot of growth through their sustainable technology arm.  

Sam Benstead: National Grid is an interesting one. It's a UK listed company. Is it typical for you to find opportunities in the UK?  

Maggie Fanari: We don't have a specific allocation by geography, so we really look to identify, as I said, across quoted equities or private equity and uncorrelated strategies. We'll look to see the allocation that we want to have there and then we look for the best investments around the world in order to fill those capital allocations. So at times they could be in the in the UK when we find very exciting opportunities like National Grid.  

Sam Benstead: Is valuation very important to you when thinking about what you invest in? And have you got a lot of exposure to expensively valued US technology shares?  

Maggie Fanari: So we're always we're always looking for growth opportunities within our portfolio, but we have the flexibility to access them either through quoted equities or through our private investment portfolio. We took that decision about a decade ago to invest in technologies through our private through our private arm of our business. That's not to say that we don't have some exposure to technology in our quoted equities portfolio for names that we've previously bought, such as Amazon as an example. But through our venture and growth investing, we've invested with some, in our view, top quartile managers like Thrive or Founders Fund or Iconiq that can give us access to, for example, the AI theme. I think we've all seen some of the news media reports around Thrive, which previously led prior rounds of open AI. So that would be an example of how we how we look for growth, but we also look for the other side of the equation valuations. And what we've seen on the public side of our portfolio where we actually increased our allocation to public stocks earlier this year is given the concentration of capital into Mag Seven. There have been a number of overlooked areas in the market and one of those areas we identified are small and medium cap stocks where we saw multiples trading at decade long lows. So we identified some really interesting opportunities in that space, which gives us a lot of growth on the upside and we feel well-protected given our entry valuations.  

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Sam Benstead: The next part of your portfolio is private equity. So why is it important for retail investors to have that in their portfolios?  

Maggie Fanari: Well, it's been a very successful strategy for RIT. We started investing in private investments in the early 2000 and in particular identified technology as a theme. Over the last decade, we've been able to generate just a bit over 50% IRRs (internal rate of return) for our investors from our private investments. And we do that through our partnership model, where we identify the best managers in the world and we become LPs in those funds. And then that helps us also identify direct investments that we can make and some of their most compelling, highest conviction companies that they see through their lens. We do recognise that venture and growth has all been painted with the same brush, but one has to look at carefully, well, who are the managers that we're investing in? So if we take Thrive, we've spoken about OpenAI. If we take Iconiq, which is a top quartile San Francisco based fund, they invest on behalf of Silicon Valley. We're invested in Founders Fund, which is Peter Thiel's fund, and we've made some really interesting investments over the years.  

One of the ones we're most notable for is Coupang, which is an investment we would classify as the Amazon of South Korea. And there we invested $50 million. We realised $340 million in just under five years. This is a name that is also a compounder. So we also own it and we continue to own it today in our public markets portfolio because it's a name we know really well and it compounds the growth. Most recently in our interim reports, we announced the sale of a company called Lead based in the US. We invested in that company in 2021 and we were able to realise an IRR on that investment of just north of 40% and generated two and a half times our capital. So it's a very important part of our strategy. We've been doing this for a long time and we see a lot of really interesting growth opportunities coming from this part of our portfolio to generate returns for our investors that they might not otherwise get access to in other parts of the market.  

Sam Benstead: Valuations of private equity companies have come under some scrutiny and it's been one of the reasons that there's been lots of wide discounts in private equity investment trusts. So what is your approach to valuation and how do you value your private assets?  

Maggie Fanari: So I'm really glad you've asked that question. And we have a very rigorous and robust process internally. So if we think about the funds that we've invested in, they are valued every quarter. So that's mark to market every quarter for our fund investments. And then with our direct investments, those are reviewed by our Independent Valuations Committee twice a year. And then our auditors also take a look at the valuations. And I think at times we've been more characterised as a bit conservative in how we value our companies. Again, going back to our most recent example of Lead, a 2021 investment where we made two and a half times our capital and just exited very recently.  

Sam Benstead: And are you generally holding private companies until they list on the stock market or they're sold to other investors. How active are you in that part of the market?  

Maggie Fanari: So we're quite active. So some of our investments are held through fund managers who on our behalf will realise those investments. But within our directors portfolio, we do realise that the IPO market has not been as robust as it was. And in many ways we're waiting for the IPO market to reopen. But we what we've been able to show in our interim results most recently is we've had a number of realisations that have been at or above our carrying values really because we've seen a lot of activity in the secondary markets for names that we own, as well as M&A events that have taken place in our portfolio. So we're always actively looking for value, but we're never going to sell an asset because we must, we have a permanent capital vehicle and we know that private investing requires patience, but we're really excited about the companies that we own today.  

Sam Benstead: Uncorrelated strategies is the final part of your portfolio allocation. So what are these and why are they important for retail investors to own?  

Maggie Fanari So in that part of our portfolio, it ranges anywhere from 20 to 25% of what we do, and that's our diversifier from the equity exposure we have through our public markets and through our private equity markets. Today that's largely credit strategies where we're invested in specialist managers and then we'll look to co-invest alongside them.  

Sam Benstead: And if they've been successful as diversifies.  

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Maggie Fanari: Yes, they've been very successful. I mean, some of our notable investments in that area have included buying Pizza Express bonds during Covid or investments in Aston Martin. At the time, they were refinancing their debt. What we really look is to ensure that our capital is as safely protected as it can be and that we have asymmetric, strong growth potential to the upside.  

Sam Benstead: And this is another area that DIY investors generally don't have access to. So why is it important that they own these types of funds via your strategy?  

Maggie Fanari: I would say because we're invested in the best fund managers in the world who produce top quartile returns and you're able to do that through our IT and also benefit from the other exciting investments and managers that we have in our public equities portfolio, in our private asset portfolio. And also we give a lot of thought to portfolio construction.  

Sam Benstead: Maggie, thanks very much for coming into the studio.  

Maggie Fanari: Great. Thank you Sam. I'm happy to be here.  

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can, like, comment and subscribe. See you next time.