Annual Report 2011

RIT Capital Partners plcACCOUNTS & REPORT ANNUAL ANNUAL REPORT & ACCOUNTS 31 MARCH 2011 31 MARCH 2011 RIT CAPITAL PARTNERS PLC ANNUAL REPORT AND ACCOUNTS 2011 1 Financial Highlights and Performance 3 Chairman’s Statement 4 Investment Director’s Review 7 Board of Directors 19 Directors’ Report 21 Corporate Governance Report 26 Directors’ Remuneration Report 33 Report of the Independent Auditors 39 Consolidated Income Statement 41 Consolidated Statement of Comprehensive Income 41 Consolidated Balance Sheet 43 Balance Sheet of the Parent Company 44 Consolidated Statement of Changes in Equity 45 Parent Company Statement of Changes in Equity 46 Consolidated Cash Flow Statement 47 Parent Company Cash Flow Statement 48 Group Accounting Policies 49 Notes to the Financial Statements 55 Historical Information 90 Financial Calendar 90 Annual General Meeting 91 Explanatory Notes 95 Advisers 100 Company Registration Number 2129188 RIT CAPITAL PARTNERS PLC ANNUAL REPORT AND ACCOUNTS 2011 2 CORPORATE to deliver long-term capital growth, while OBJECTIVE preserving shareholders’ capital; to invest without the constraints of a formal benchmark, but to deliver for shareholders increases in capital value in excess of the relevant indices over time. INVESTMENT to invest in a widely diversified, international portfolio across a range of POLICY asset classes, both quoted and unquoted; to allocate part of the portfolio to exceptional managers in order to ensure access to the best external talent available. Further information relating to the Company’s investment policies, including asset allocation, risk diversification and gearing, are contained in the Directors’ Report on page 22. RIT CAPITAL PARTNERS PLC 3 FINANCIAL HIGHLIGHTS 31 March 31 March 2011 2010 Change Total Net Assets (£ million) 1,984.0 1,815.7 9.3% Net Asset Value per Share 1,289.4p 1,180.1p 9.3% Share Price 1,307.0p 1,082.0p 20.8% Premium/(Discount) 1.4% (8.3)% PERFORMANCE 1 Year 5 Years 10 Years RIT Capital Partners plc (NAV per Share) 9.3% 31.2% 166.2% MSCI World Index (in £) 5.2% 8.2% 11.1% FTSE All-Share Index 5.4% 0.6% 13.1% PERFORMANCE AGAINST RELEVANT INDICES OVER 10 YEARS 140 200 RIT Diluted NAV per share RIT NAV per Share 120 Morgan Stanley Capital International World Index (in £) MSCI World Index (in £) 100 150 FTSE All-Share Index FTSE All-Share Index 80 Investment Trust Net Assets Index 10060 40 50% Change 20 % Change 0 0-20 -40 -50-60 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 01 00Mar 02 01Mar 03 02 Mar 0403 Mar 0504 Mar 0605 Mar06 07 Mar07 08 Mar08 09 Mar09 10 10Mar 11 RIT CAPITAL PARTNERS PLC ANNUAL REPORT AND ACCOUNTS 2011 CHAIRMAN’S STATEMENT 4 It is an old market adage: bull markets climb a wall of worry. The past year certainly saw a bull market develop once early 2010 market weakness was overcome. But it just as certainly, also, reinforced a wall of worry. In the year to 31 March 2011, your Company’s net asset value per share (“NAV”) appreciated by 9.3% to 1,289.4p, marking a new high NAV level. The MSCI World Index in Sterling, the most relevant benchmark, rose by 5.2% and the FTSE All-Share Index rose by 5.4% over this period. Our focus remains unchanged: to deliver longer term gains while preserving Lord Rothschild shareholders’ capital. Over the past 5 and 10 years our returns now stand at 31.2% Chairman and 166.2% as compared with MSCI World Index returns in Sterling of 8.2% and 11.1%. The latest available NAV, at 20 May, was 1,265.4p. The dominant investment development this past year has been the rise in commodity prices accompanied by a decline in the value of the US Dollar against most currencies. The Thomson Reuters/Jefferies CRB Index of commodities appreciated by over 30%, with gold and oil rising by almost 29% and 25% respectively, while the trade-weighted Dollar declined by more than 6%. I pointed out last year that, with returns on cash “negligible”, money would seek higher-returning asset classes, and thus incur more risk. So the continued advance in the prices of most financial assets has not come as a surprise. There was renewed faith in the persistent growth of the BRICs (Brazil, Russia, India and China). But inflationary pressures grew there too. Two things resulted from this: commodities and related equity sectors generated the highest returns. Yet, overall, emerging markets appreciated only modestly more than developed markets because fear of inflation made valuations seem reasonably full. The gathering flight from the Dollar served only to exacerbate the search for investment refuges safe from currency devaluation. The very success of US and other governments’ policies in printing money to refloat financial assets has contributed to the strength of commodity prices and exacerbated inflationary pressures. Whatever the current uncertainties, we remain clear as to what we will do. We will stay liquid and nimble enough to respond to financial crises when they occur; and we will continue to seek out investments that create fundamental, lasting value. To serve both these aims, in January we took out a US $400 million credit facility which we drew in full, locking in historically low borrowing rates. ASSET ALLOCATION We set out below our asset allocation, shown as a percentage of your Company’s total net assets. % of net assets at % of net assets at 31 March 2011 31 March 2010 Quoted equities 14.7 19.5 Long equity funds 39.1 40.9 Hedge funds 6.4 7.8 Unquoted direct investments 11.6 10.2 Unquoted fund investments 11.0 10.5 Real assets 14.1 11.6 Absolute return, fixed income and currency 0.6 2.3 Liquidity 15.4 14.6 Borrowings (12.6) (16.8) Other assets/liabilities (0.3) (0.6) Total net assets 100.0 100.0 5 Our level of public market exposure has stayed broadly between 50% and 70% over the year. We maintained above-average exposure to the commodity and related sectors as well as a significant exposure to emerging markets, in particular to sectors aimed at growing domestic demand within these economies. Some US-orientated growth and large capitalisation stock funds also performed well for us. Recently, we have started to build modest exposure to “frontier markets” in the belief that many of the factors that made the BRICs attractive some years ago are today present in these markets. Real assets too were a major contributor to performance with a return of around 28% on our average exposure of 13% to these strategies. Funds invested in oil and gold shares, as well as exposure to gold and oil via futures, were the primary drivers of return. More recently, we have made some reductions to our exposure in these areas. The unquoted portfolio as a whole produced gains of a little over 15%. Notable disposals in the period under review included our holding in The Economist Newspaper which was sold for £24.7 million in December 2010. Taken together with dividends received of £15.1 million, this investment has generated a profit of £38.3 million for your Company over the years, compared with its original cost of £1.5 million in 1988. This represents a multiple of 27x and an IRR of 21% over this 22-year period. Shareholders may remember that we were cornerstone investors in a new private equity fund, Darwin, in 2007 which raised committed capital of £217 million, of which we represented £50 million. In February 2011 Darwin realised their first investment, Maximuscle, at 2.7x their cost, representing an IRR of 37%. The benefit to us of this transaction amounted to some £12 million. Agora Oil and Gas has prospered due to its involvement in the Catcher field in the UK North Sea, where substantial resources of oil have been found. Although the increased level of tax on UK North Sea profits is a negative factor, Agora will be focusing its exploration on the Norwegian sector of the North Sea. Therefore, an important development for Agora is the exploration agreement it recently signed with Statoil the leading Norwegian oil company, to co-operate in the Norwegian and UK sectors of the North Sea. Last year, I emphasised the importance that we place on managing our currency exposure and diversifying our exposure amongst currencies other than Sterling. We continue to believe that this is the right approach. However, as Sterling appreciated during the year against some other currencies, particularly the US Dollar, the value of non-Sterling investments suffered on translation back into Sterling. Let me look now at the time ahead. I reminded shareholders in my Chairman’s Statement last year that our aim of preserving shareholders’ capital takes precedence over short-term capital growth if we feel that there remains above-average risk of capital loss. There is, I believe, a growing awareness of the dangerous position which confronts many countries, particularly those in the developed world. In spite of these concerns, we continue to take advantage of areas that we believe are attractive, but we will remain cautious in terms of the quantum of capital that we allocate. For instance, your Company has benefited from the rise in commodity prices. Yet a noted US strategist has pointed out that commodity returns relative to equity returns are at a 200-year high on a rolling 10-year basis. We are not alone in having noted the attractive level of valuation of many quality companies, eclipsed till now by commodity and cyclical companies. After a decade of commodity leadership, a shift to a new regime is a possibility; identifying a new trend, if indeed it comes to pass, will be a major factor in future investment performance.

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