InvestmentsMar 22 2023

Trust managers receive £55mn free shares despite underperformance

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Trust managers receive £55mn free shares despite underperformance
RIT's managers recieved £55mn of free shares over the past three years.

The latest accounts of the £4.1bn RIT investment trust reveal the managers received £55mn of free shares over the past three years, a time period when the return achieved was just 5 per cent - considerably below the return of its benchmark. 

RIT is managed by J Rothschild Capital Management, and the accounts for the trust, covering the period of the 2022 calendar year, showed a payment in shares to the management company of £20.3mn for that year, and £55mn over three years. 

The £55mn of free shares goes to the staff and directors of J Rothschild Capital Management. The only business activity of J Rothschild Capital Management is the running of the RIT trust. 

Ron Tarbouche, who runs RIT on a day-to-day basis, is chief investment officer of J Rothschild Capital Management. 

Tarbouche and the company’s chief executive Francesco Goedhuis put their names to the fund manager’s statement in the most recent RIT accounts. 

The four directors of J Rothschild Capital Management were paid a combined £14mn in cash in 2021, and had an additional “deffered compensation” - which is likely to include the free shares - of £11.1mn.

This 5 per cent return was for the three years to the end of 2022. Since the start of 2023 the trust has lost a further 11 per cent, according to data from FE Analytics.

In a note to clients seen by FTAdviser, Alan Brierley, director of investment trust research at Investec, said he has long been a fan of the trust due to its defensive characteristics, but recent performance and the information about the share payments means he has now advised clients to sell their investment in the trust.

In RIT's annual report, the company said the £20.3mn payment for 2022 was part of a multi-year remuneration plan, rather than just reflective of the performance of 2022.

The net asset value of the trust declined by over 13 per cent in 2022 alone. 

The board of the trust also said the share payments are due to the managers hitting two of their key performance indicators, related to “business principles” and “culture”, although they did not hit their key performance indicators related to investment performance.

In 2022, the trust’s net asset value total return was a loss of 13.3 per cent, while the key performance indicator was to beat the return of a benchmark which lost 12.9 per cent.

RIT’s annual management charge is 1.59 per cent, this compares to the average fee for trusts in its sector of 1.18 per cent. 

According to the trust’s factsheet at the end of January, 39 per cent of the capital is invested in unquoted companies. 

Brierley also expressed concern that around 27 per cent of the net asset value of the trust is in unquoted companies that have yet to issue financial reports this year.

Many unquoted companies have had to take write downs in the valuations of their shares over the past year as a consequence of the higher interest rate environment. 

Brierley said in his note to clients that he believes the net asset value of the trust will fall by around 4 per cent this year as a consequence of the looming write-downs in the value of the unquoted assets. 

In the annual report to shareholders, the trust’s chair, Sir James Leigh-Pemberton, who is also an adviser to Prince William, said: “Private investments remain a key feature of the overall approach and have cumulatively added around a 26 per cent contribution to the NAV over the last three years. 

"This portfolio is widely diversified across sectors and styles, with many investments showing strong performance, and the majority of the largest direct investments profitable.”

On performance more broadly, Leigh-Pemberton said the trust’s net asset value has outperformed relative to the market on a three and five year basis. 

The largest shareholders in RIT are the family of Lord Jacob Rothschild, which has a stake of over £200mn in the trust. 

Lord Rothschild was chairman of RIT until 2019, when he was succeeded by Leigh Pemberton. 

A representative of RIT said: "RIT’s investment portfolio has outperformed global markets over the last three and five years, and generated a 140% total return over ten years, well in excess of comparator trusts. Private investments have always been a key aspect of the approach, and generated realisations of £1.1 billion over the last three years, while adding approximately 26% to the NAV.  Remuneration for the Manager is designed and implemented by the independent RIT Remuneration Committee, which is itself advised by independent remuneration consultants.  Awards are designed to maximise the links to performance and alignment with shareholders.  To reinforce this alignment, there has been a shift away from cash awards to share awards.  These awards are subject to three to five-year deferrals.  There is also an annual bonus cap of 0.75% of net assets, which has never been reached.  The Remuneration Committee retains the usual discretion over malus and clawback.  All amounts are disclosed in line with regulations and accounting requirements.”

david.thorpe@ft.com