Many people, especially the very wealthy, are more concerned with wealth preservation than with maximising returns, and will happily sacrifice some performance for a smoother ride. This trade-off has had poor results for most of the “absolute-return” and “multi-asset” funds that have become so fashionable in recent years. However, there are some exceptional funds that have delivered strong returns while still managing to limit losses in bear markets.
The best known of these, RIT Capital (LSE: RCP), has an advantage in that the family of its chairman, Lord Rothschild, controls 21% of the company. Smaller shareholders can be reassured that their investment is managed by people who are fully focused on performance, rather than asset gathering. With nearly £3bn of assets, RIT does not need scale, and the family does not want to see its influence diluted. At first sight, last year’s total return of 14.2% looks disappointing when compared with the 17% return from the UK and 29% from global equities, but the three-year return of 59% is impressive and well ahead of the global equity return of 47% over the same period. Moreover, “since inception, [the fund] has participated in 75% of market up moves and only 39% of down moves”, points out Ron Tabbouche, the fund’s chief investment officer.
Last year’s return was achieved with a decreasing exposure to quoted equities – this fell from 67% of net assets at the start of the year to just 56% at the end. Private equity accounted for 24%, absolute-return and credit investments 24%, and real assets accounted for 3%, including a leasehold on Spencer House, a mansion overlooking Green Park in London. That, of course, totals 107% – the trust has a modest amount of debt. It hedges some currency exposure to both enhance returns and reduce risk and this was “an important contributor to 2016 returns”, thanks to a reduced exposure to sterling.
Some 80% of the quoted equity portfolio is invested with around 15 equity managers (46% in long-only funds and 34% in hedge funds). Directly owned stocks then account for the remaining 20% of the equity portfolio. The private-equity portfolio is also split between direct holdings and funds. The former included a stake in Williams & Glyn, the bank spun out of Royal Bank of Scotland, which returned 80% over three years. Fund exposure includes a sizable holding in 3G, which is invested alongside Warren Buffett in Kraft Heinz. Fees charged by external fund managers amounted to 1.17% of average net assets in 2016, but RIT’s other costs were very reasonable, at 0.68%. Historic performance of the funds has been better than that of the direct investments, but this changed in 2016, when equity funds had a dull year, but direct equities did better. Overall, the mix works well.
RIT shares currently trade on a 5% premium to net assets, but opportunities to buy them at a discount are infrequent. Some of the premium is justified by the conservative valuations of the private-equity investments, and the rest by the unique combination of strong returns and good protection from downside markets. Competitors, including Personal Assets and Ruffer Investment Company, did well in the 2008 meltdown, but have been pedestrian performers subsequently. For those who are somewhat cautious and believe that you get what you pay for, RIT remains the preferred choice.
Sheri McCoy, the chief executive of Avon Products, the direct-selling cosmetics firm, faced new pressure last week as activist investors called for her replacement, says David Benoit in The Wall Street Journal. Barington Capital Group and NuOrion Partners, which together own more than 3% of Avon, also said that the firm’s turnaround “needs to go faster”. Avon’s shares dropped 22% to $3.62 on the news, down from highs of $44 in 2008. Barington had previously called for McCoy’s replacement in 2015, but backed off when Avon signed a deal to sell its US business to private-equity firm Cerberus Capital Management. Despite the fall in share price, the company says that its three-year turnaround plan remains on track.
In the news this week…
• There are “tangible signs” that a growing number of investors are taking action to rein in excessive pay for company bosses, says Madison Marriage in the Financial Times. For example, Canadian fund house BMO Global Asset Management voted against 74% of US remuneration proposals last year, according to research firm Proxy Insight, while UK asset manager Aviva Investors voted against 84% of US pay deals. This can be compared with BlackRock’s voting history in the 12 months to the end of June 2015, which saw the world’s largest asset manager vote approve 97% of pay proposals. Admittedly, BlackRock was “slightly less lenient” on pay last year, approving just 96% of pay packages.
• The Investment Association’s UK All Companies sector was the best-selling sector with UK investors in March for the first time since December 2013, with net sales of £650m, according to the latest fund flow data from the Investment Association. In terms of asset class, equities saw the highest inflows in March, with net sales of £1.7bn; this is the second largest monthly inflow into the asset class on record. By region, UK equity funds were the best-selling group, with net sales of £924m, while global equity funds were the next best-selling, seeing net sales of £580m. Overall, UK investors put more than £4bn into funds during the month of March.