After a stellar year for markets, as we saw in 2013, I often find it interesting to look at funds that appear to have performed less well. This is where opportunities to invest in unfashionable areas at attractive valuations can arise.
RIT Capital Partners (RIT), the investment trust, has been one such fund. At various points during 2013 it traded on double-digit discounts to net asset value (NAV). RIT's priority is to offer a degree of capital preservation in tougher stock market conditions while growing capital over the long term. While investors have been fearful at various points over the past five years, markets have generally climbed the wall of worry and performed strongly.
It is worth reminding ourselves of the average duration of an equity bull market. The current run has lasted 60 months compared with an average of 64, according to analysis by Majedie Asset Management. However, six of the past nine lasted 61 months or less. On that reckoning the current one is mature. Furthermore, the average size of a bull market is 163% while the current one has seen the market rise 154% from its low. Importantly, the analysis also shows average annualised losses in a bear market are 35%.
I am not forecasting the end of a bull market, merely noting that statistically the current one is looking long in the tooth. At such times it can be worth considering funds that might not capture all of the upside, but aim to limit some of the grisly downside.
RIT aims to do this by taking a multi-asset approach – holding a combination of equities, funds, currencies, private equity and real assets such as gold. As it is not fully invested in equities, it would not be expected to keep pace with a strongly rising market. This has contributed to the de-rating over the past couple of years, but at the same time a new investment director, Ron Tabbouche, was appointed, which probably also unsettled the rating.
The portfolio is managed using a team-based approach and there are six elements that will drive performance over the long term. First is the wider economic themes and trends the team believes will influence the portfolio. These will often determine how aggressive or conservative they are. During 2013 two themes that benefited the portfolio were increased exposure to Japan and technology stocks.
Second is single stocks. These have been concentrated down to a portfolio of 10 to 12 high conviction ideas that have the potential to contribute strongly to performance. They account for about 20 per cent of the portfolio and key holdings include AIG, Qualcomm and H&M. Third, there are externally managed funds run by managers with strong track records and which have often closed to the general public.
Fourth, the team actively manages currency exposure. The focus is on sterling and the US dollar, while they are negative on the euro. The fifth element is the downside protection, which involves blending assets such as equities, absolute return funds and gold.
Finally, there are the private equity investments, accessed through the team's unique network of contacts, the in-house team and externally managed funds. This accounts for about 25% of the portfolio and has added plenty of value, but this tends to be lumpy because private equity investments mature at different times.
Having increased exposure to equities in 2013, benefiting from rising stock markets the team has recently been increasing exposure to absolute return funds, which could offer some protection in a market sell-off. Overall, the portfolio remains diversified geographically with 45% in North America, 20% in the UK, 14% in emerging markets, 12% in Europe, 9% in Japan and a small amount in Asia.
This is a unique fund ideally suited to the closed-ended investment trust structure. It remains on a discount to NAV of about 4.2%, though this has been narrowing and compares with a 12-month average of about 7.7%. That said, in the past it has not been uncommon for the fund to trade at a premium. If you are looking for a genuinely different investment and believe the bull market is a little long in the tooth, this could make an ideal addition to your portfolio, and for the record it remains in my Sipp.