A conversation with RIT Capital Partner’s Lord Rothschild

I recently had the opportunity to listen in on an interview with Lord Jacob Rothschild and Martin Currie CEO Willie Watt, and even get to quiz him a little myself at the Martin Currie Global Economic forum in London.

If you’re a regular reader of WhichInvestmentTrust.com you’ll know we’re quite a fan of the investment trust he runs RIT Capital Partners (LON:RCP) , even though performance recently has been less than good (see table below). He and his family are large shareholders in the trust which was originally established to manage some of his family’s wealth.

Lord Rothschild has a 17% shareholding. This is important because it aligns Lord Rothschild’s personal financial interests with that of shareholders in RIT.

Lord Rothschild has quite a pedigree with financial services businesses; he was a founder of asset manager GAM, and he was involved from the beginning with wealth management business St James Place.

He is a shareholder in Scottish fund manager Martin Currie, hence the invite to speak at their annual investment shindig.

Geopolitics

Lord Rothschild’s interview followed that of political scientist Ian Bremmer of the Eurasia Group, so the discussion focused initially on his take of global politics and its effect on investment managers.

“Geopolitically there is more to worry about now than at any time since the end of the cold war” he began. “Iran is hell bent on the destruction of Israel and is only probably 6 months away from having a nuclear weapon.

“Greece is in an impossible situation. Rising debt, contracting GDP, 25% unemployment and a very awkward political situation with a fragile coalition.

It seems to me that a program of austerity is self defeating. Its cuts GDP and increases debt, you have 25-30% unemployment in Spain. Austerity can’t be the solution to this”.

Pro Europe

In voicing his concern at the unchecked Euro-scepticism prevalent in the UK with many in the Conservative party and in UKIP advocating a referendum on the issue of Britain withdrawing from the European Union, Lord Rothschild highlighted a recent speech by the Polish Foreign Secretary Mr Radek Sikorski that attempted to shoot down some myths that have become commonly accepted as true in Britain. In his speech at Blenheim Palace in September, Mr Sikorski made several salient points which Lord Rothschild felt needed repeating. He reminded his audience at Blenheim that:

• 50% of the UK’s trade comes through the EU
• Until recently Ireland accounted for more of our exports than the BRIC’s combined
• Only 1% of UK GDP goes toward funding the EU whereas the public sector in the UK accounts for over half of public spending.
• British workers work fewer hours than Greeks, Spianards & Poles and work on average below the average of EU workers.
• EU GDP is 2.5 times that of China & 9x that of India. Talk about a huge market on our doorstep.

You can read Radek Sikorski’s speech here.

Cynically the Labour opposition, as we’ve seen with the attempt to cut the EU budget, sided with Conservative Euro-sceptics for short-term political gain.

“It is a most extraordinary time” added Lord Rothschild, “to think back to Ted Heath and Roy Jenkins, there is no one now making the very legitimate case for our continued participation and membership of the European Union”. 

“The Euro sceptics argue that we should get special treatment from the EU if we play hard ball with the budget at this most delicate of times when so much could go wrong. If more people in the UK just took a few moments to consider what could happen if we play hard ball. I mean why Europe should negotiate our exit to our satisfaction when our trade with the EU represents 50% of our exports whilst the EU’s trade with the UK represents only 11%”.

America

“The tight election result in America isn’t the firm electoral mandate one would have preferred from an investors perspective. The fiscal cliff is a very daunting prospect. But still, with 4-5% growth in USA, a technology industry unrivalled in the world, the prospect of self sufficiency in energy again. They have a great neighbour to the north in Canada, tons of natural resources, reasonable people. And in the south in Mexico they have cheap labour.

All else seems fine, they have so much going for them in the US. Of course being the world’s reserve currency helps them a lot”.

When asked how his fondness for the US has affected asset allocation at RIT he volunteered:

“I’m not particularly proud of our performance this last year. We’ve been too cautious. I wish we had been less conservative in our commitment to equities and to the US market.

We should all be responding to our best friend Ben Bernanke. He’s keeping interest rates low and he’s doing everything he possibly can to raise asset prices.

We did some of that but not enough.

I’m afraid that we were doing what I think a lot of investors and fund mangers were doing which is to sit on the sidelines not taking a lot of risk. We were too cautious, waiting to see what’s going down.

Emerging Markets

“We’re all playing the asset allocation game. The us market did a lot last year, its recovered now, and emerging markets (EM) didn’t. I think you need probably an increased exposure in 2013 to EM. I wouldn’t bet against EM in the long-term.

Rockefeller

I got the opportunity to ask him about a deal he did a few months ago which had absolutely fascinated me, buying a stake in a Rockefeller family venture. We covered that at WhichInvestmentTrust.com here.

The deal fascinated me because I never knew and Lord Rothschild never bothered to tell me the families had links going back many years. In my little mind it seemed like the Ewings (Dallas) and the Carringtons (Dynasty) were coming together.

I asked him what he envisaged the deal with Rockerfeller growing in to and what sort of impact it might have on RIT?

“We’ve worked with Rockefeller for a number of years and the opportunity came up. I went to see David Rockefeller senior (born 1915). He said to me when did we first meet. I said I don’t know about 30 years ago? Of course he has a system for recording meetings that predates all sorts of technology, so he went to his bureau and pulled out a drawer and said well we actually met 51 years ago. And that wasn’t all, he had records of every time we’d met since then”.

“What do they do, well they’re an asset management business, And we believe it’s a great franchise. It manages about $35billion, and they’re got considerable scope for growth, and that’s why we did the deal”.

Lord Rothschild was asked why he had so many Private Equity investments within RIT when this industry was so discredited and underperforming. He responded:

“They’re not really PE (Private equity). We’re a permanent company (investment trust) and that is the perfect structure for taking direct stakes in businesses. You’ve got to bear in mind though that unlike PE we’re not leveraged when we do it. 

If you look at our returns probably our greatest returns has been from that activity. Our sale of Agora, an oil business to Cairn recently for instance.

For patient investors in a closed ended fund structure now might be the most perfect opportunity to acquire private investments precisely because of the difficulties being faced by much of the private equity sector and the reticence to lend by the banks because assets with fantastic long-term prospects can be purchased very cheaply.

Though not illustrated below, over 10 years RIT has returned 214%, as against 110% for its index and 164% for its sector. All of this on a total return basis (taking in to account dividends and share price increase).

RIT Capital Partners Investment Trust Metrics (November 2012)