RIT Capital Partners: portfolio not to blame for share price slump

interactive investor's Sam Benstead gets an update from Maggie Fanari on the performance, portfolio, and outlook of RIT Capital Partners Ord (LSE:RCP).

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.  

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Sam Benstead: The goal of RIT capital Partners is to grow and protect investors capital. But recently it has failed to do so. The shares are down 25% in three years and about 7% over five years. So what are the reasons for this underperformance?  

Maggie Fanari: Thank you, Sam. I'm going to take that question in two parts. So I'm going to break it down from the what have been the net asset value returns our trust has generated for investors. And from that perspective, over the last decade, that has been a 10.5% annualised return, or roughly 112% total return for our investors. Most recently and broadly as a sector. The investment trust sector has been trading at a discount and we've also been impacted by the discount that the sector has experienced. But by no means have we been sitting by the sidelines. We've seen this to be cyclical within the sector over time, and typically the sector does rebound. But from our perspective, we've been aggressively buying back our stock. So we've bought back nearly 7% of our market cap.  

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And what we've also look to do is increase information access to our investors and improve our communications efforts. So as an example, we recently relaunched our website to support our investors and we have also look to improve our communication investor relations efforts through greater shareholder engagement. And we'll continue to step up our efforts in that area.  

Sam Benstead: So the share price has fallen, but the NAV, the net asset value, has been more resilient.  

Maggie Fanari: Yes, it.  

Sam Benstead: The trust is on a 30% discount. What are you doing to narrow this discount and what are the reasons behind this discount?  

Maggie Fanari: Well, I think we have a very compelling growth opportunity for our investors, particularly at the discount that we're trading at today. We're well-positioned to make money for our shareholders and also protect it in real terms. What we've been told and since I've assumed the role of CEO over the last six months, is that you have a really great story to tell. You've got the performance through total returns. What you really need to do is go out and share your story with other shareholders and potential investors.  

Sam Benstead: 30% is quite a wide discount. What are the causes of that? You mentioned a selloff in investment trust generally, but is there anything specific to RIT which might have caused that 30% discount? For example, the private equity exposure.  

Maggie Fanari: So a large part of the discount is related to the industry. The other part of the other part of the discount is due to our more limited communication that we've had in the past with investors, hence the relaunch of our website and greater and greater access and greater discussion with investors and potential shareholders.  

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Sam Benstead: And in terms of the portfolio, what has and hasn't worked well over the past three to five years?  

Maggie Fanari: Well, over the last three to five years. if we go back in 2020 and 2021, we had very strong returns. In 2022, our net asset value fell by 13.3%. To put that in context, our benchmark was down 12.9%. And in part, the reason why we had negative returns that year was off the back of our private investments. But that was after two very strong, exceptional years. And since then, our performance has improved. And by no means have we demonstrated negative returns in our private book that the market thought venture and growth would be trading at 50% to 60% discounts.  

Sam Benstead: You became CEO of J. Rothschild Capital Management in February this year. So what changes have you made to the portfolio since taking charge?  

Maggie Fanari: So as CEO this year I've really prioritised actively listening and learning from our shareholders. And part of that has been to improve our communication efforts and also to… we have a very strong, talented team internally and we decided in the very early part of this year to switch our allocation and increase our quoted equities exposure because we were really looking for and found in overlooked areas of the market very interesting opportunities. So in our annual report, we spoke about the small and medium cap space and the opportunities we were seeing there, the opportunities that we were seeing in Japan, and we looked to increase our exposures.  

Sam Benstead: Can you give some examples of companies or themes in the small and mid-cap space which you are finding exciting and opportunities in at the moment?  

Maggie Fanari: Sure. I'll give you an example of a company called Talen Energy, which is a US power producer in the US. This this company had come out of Chapter 11 [bankruptcy] and we saw very strong downside protection on our entry valuation and we saw strong catalysts for growth. And one of those catalysts was realised in the earlier part of this year where Amazon Web Services came in and bought one of their data centres, creating $1.5 to $2 billion of value for the company. And those are the opportunities we that we very much like and find truly compelling and fit the DNA where we're really looking to protect on the downside and see a lot of potential for growth on the upside and identify these opportunities. Also working alongside our specialist managers.  

Sam Benstead: There, you gave an example of focusing on the bottom up picture when investing in a company, but do you also think about the macro economic environment and how does that affect your investment process?  

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Maggie Fanari: We don't take specific macro bets, but we do very much pay attention to what's going on in the global economy as we look to underwrite individual investments or how we look to identify risks, evaluate them and potentially mitigate for them. So in terms of macro outlook and what's going into our thinking today, either through portfolio allocation or investment selection, clearly we're waiting, trying to understand what's taking place in the US between what is the actual underlying growth in the US economy and then the implications for interest rate cuts. Now we saw the Fed cut 50 basis points last week. The remaining question is how much further will they go and over and over what timeframe? Other areas close to home for us in the UK where we're exposed to sterling. So we're always looking at fiscal discipline that's coming from the UK government given the implications that would have on the currency. And then more broadly, we have exposure to Japan. So while we're trying to see what happens with interest rates in Japan, but also take the view of what's happening in Japan will have broader global implications, as we saw in July, where the interest rate decision by the Bank of Japan had implications on capital flows globally.  

Sam Benstead: Interest rates are now falling, as you mentioned, and inflation is back at central bank targets. Is this going to be good news for your share price?  

Maggie Fanari: Again, our share price, broadly speaking, if interest rates come down, one would assume that there would be more capital flows into the equity markets, which would be a net benefit for us and other investment trusts. But also the importance around interest rates in particular, is that should reopen the IPO markets and increase M&A activity, which means for our private investments, we should see an increase in realisations coming through.  

Sam Benstead: And with this different economic environment, has that influenced how you manage the portfolio?  

Maggie Fanari: It's impacted not necessarily how we manage the portfolio, but how we think about portfolio allocation decisions and where we see the most compelling opportunities. So whether that's we shift our portfolio to have more quoted equities exposure because we're seeing more opportunities there or whether we shift the portfolio to private or uncorrelated strategies, but we don't necessarily make strategic decisions just because interest rates will move. That's one variable and a number of other investment decisions that we're making as we think about both top down and bottom-up portfolio decisions.  

Sam Benstead: And finally, the question we ask all of our guests, do you personally invest in the trust?  

Maggie Fanari: Yes I do. Both myself, our board are also shareholders in RIT and in fact, everyone within the manager is in an RIT shareholder and we're heavily incentivised and aligned with our shareholders from that perspective.  

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

Maggie Fanari: Great. Thank you. 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.