Join the RIT family

It could be time for investors to put on their tin hats again. Fears about sovereign debt defaults are hitting the financial markets hard, and many of the bets that made such a good play last year are going into reverse. With that in mind, shares of RIT Capital Partners, an investment trust with a reputation for wealth preservation as well as capital appreciation, look an interesting defensive play.

The focus on preserving wealth makes sense in the light of the trust’s background as a home for the fortunes of some of the Rothschild banking dynasty. This connection is more than a legacy. Lord Rothschild chairs the investment company and is its largest shareholder. Such a strong family influence may not be to everyone's taste, but the good news is that the family's fund management arm responsible for RIT's day-to-day investments, J Rothschild Capital Management, remains a canny operator.

The trust's investment approach is not that easy to define as it spreads itself across asset classes, countries and currencies. The eclectic mix of investments is illustrated by new positions announced in January - an unquoted operator of sub-Saharan telecoms towers, a North Sea oil and gas company and two hedge funds (one concentrating on Asia; the other on emerging-market equities). This odd mix leads some City analysts to regard the trust more as a well-run family office than a conventional closed-end fund. At the end of September, the fund had 58 per cent of its assets invested in quoted equities, 20 per cent in unlisted equities followed by 10 per cent in general debt. Geographically, the US makes up the biggest investment region, accounting for just over a quarter of the portfolio.

The trust used its wide remit to make some smart calls during the financial crisis. It increased its equity exposure during the rally and benefited from going long on commodities and short on treasury bonds. Its unquoted investments are also considered to be conservatively valued by most analysts. Indeed, a private generic drugs manufacturer, Robin Hood, which used to be the trust's second largest investment, was recently sold, netting RIT about £93m or 5.1 times its initial investment. The recent increase in merger & acquisition activity should also help the unquoted portion of the portfolio. What's more, a trading update showed that the trust had significantly reduced its exposure to the euro between the end of September and mid January from 16.9 per cent to 9.4 per cent - that should protect the fund from the current drubbing the currency is getting.

While RIT's defensive positioning means it has not participated fully in the market rallies, it has stood firm in the down legs - so firm that its share price is off less than 10 per cent since the FTSE 100's peak compared with a 25 per cent drop in the index. And, while some investors have talked of a "lost decade" for equities since the turn of the millennium, RIT's share price has risen 158 per cent over the period compared with the FTSE 100’s 22 per cent fall.

The shares currently trade at a modest discount to the fund's net asset value (NAV) and look tempting given signs that sentiment is shifting back towards defensive investment options; especially as the shares have sometimes traded above NAV. Indeed, recent heavy selling of a portfolio of investment-trust holdings by the Norwegian state pension fund is thought to have weighed on the share price. That makes it look a good time to buy.

Key fund data:

Source: Datastream, Morningstar*

Top 10 holdings as of October 2009

** Now sold (see text)

Geographical breakdown