15th Aug 2014 08:47
LONDON (Alliance News) - The search for attractively priced asset classes has become increasingly challenging, Lord Rothschild said Friday, warning that the global economic recovery remains fragile and at risk of the precarious geo-political situation in the Middle East and Russia.
Rothschild, who chairs RIT Capital Partners PLC, the London-listed investment trust in which he and his family are the largest shareholders, said the trust has become "uncomfortable" in participating in markets, which he described as "liquidity fuelled" due to central banks' policies of historically low interest rates and asset purchase programmes.
"Given current stock-market valuations, further market appreciation will continue to be influenced by central bank policy of creating money and maintaining low interest rates," Rothschild said in a statement.
"We continue to search assiduously for investment opportunities that are likely to benefit from structural tailwinds at attractive valuations and which are not conditional on short-term monetary policies," the chairman added.
Rothschild issued the note of caution alongside RIT's results for the first six months of 2014, in which the trust reported a 2.4% net asset value per share total return for the half year period. As a point of comparison, the MSCI All Country World Index's, a total return index based on 50% of the ACWI measured in sterling and 50% measured in local currencies, gave 4.1%.
RIT's net asset value rose 17 pence to 1,401 pence per share at the end of June, which, together with the 14.7p interim dividend, gave its total return. Over the same period, the share price total return, which also includes the dividend, was 5.6%. The discount at which the shares trade to NAV narrowed to 6.1% from 9.0% over the six months.
Rotschild said that the trust's individual stock portfolio, which now makes up a fifth of its NAV, outperformed equity markets over the period.
"In the first part of the year we took advantage of temporary weaknesses to increase our holdings in emerging market-related and Japanese securities," Rothschild said. "We avoided some of the sharp falls in technology and growth stocks by reducing exposure in advance of the correction."
Meanwhile, Rothschild said returns from the trust's externally managed equity fund portfolio were positive, adding that RIT will continue to concentrate its holdings into a reduced number of managers, a policy he said gives "greater focus" and allows a "more meaningful impact" on the trust's NAV.
Away from the equity markets, RIT's private investment portfolio had a "reasonably positive period" with agreed realisations of Metron, Chart Show and, more recently, Martin Currie. In addition, there were "modest increases" in value in RIT's unquoted funds and directly held investments.
Over the course of the period, RIT increased its exposure to absolute return and credit investments, which increased by eight percentage points to 15% of the trust's net asset value.
"Through investing in exceptional managers, we are well positioned to capture current structural inefficiencies in credit markets. Our objective is for this asset class to deliver high single-digit returns," Rothschild said.
Despite being wary of participating in what it considers liquidity-fuelled markets, Rothschild said the trust has taken advantage of the current low level of interest rates to put in place borrowings of GBP400.0 million. Over the period, the trust's gearing, or debt versus equity, increased to 13.8% from 5.2%. Gearing can boost income and capital returns, but also magnify losses, as a trust hopes to make enough profit to pay back debt and interest while still making money for shareholders.
"In the first six months of the year these investments have generated returns considerably higher than our borrowing costs and profits earned, subject to credit risk, will provide a significant offset against our operating costs," Rothschild said.
However, Rothschild said the trust's choices over currency allocation were a challenging area during the period, as it adjusted its exposure to sterling downwards to 52% from 54% of NAV. Its exposure to the dollar increased by 1.0 percentage point to 45%. However, these percentages exclude exposure from currency options.
"We increased our sterling exposure to a level higher than at any time in recent history; however, its appreciation since the start of the year has affected your company's NAV given the global nature of our investments," Rotschild said. "In US dollar terms our NAV return was 5.7% compared to 2.4% in sterling."
Nevertheless, Rothschild said the trust is "mindful" of what he described as the Bank of England's "continued hawkish" stance, and has taken precaution's to guard against its exposure to sterling.
"We will maintain our relatively high level of exposure to sterling, a portion of which is held through options as we see risks ahead which may cause a reversal of the currency's upward trend," he said.
RIT shares were Friday quoted up 0.1% at 1,332.56p.
By Samuel Agini; [email protected]; @samuelagini
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