Why we’re looking beyond the Magnificent Seven to play AI boom

In this Insider Interview, interactive investor’s Kyle Caldwell speaks to Maggie Fanari, CEO of J. Rothschild Capital Management, the investment manager of RIT Capital Partners Ord (LSE:RCP). Fanari explains why RIT Capital has limited exposure to the Magnificent Seven despite being positive on artificial intelligence (AI), and outlines where she’s looking for AI opportunities instead. 

She also discusses RIT Capital’s recent performance, measures taken to try and narrow its wide discount (which stood at 22% when the recording took place last month), and the outlook for inflation and interest rates. Fanari also names the biggest risk facing investors today.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio, I have with me Maggie Fanari, CEO of J. Rothschild Capital Management, which is the investment manager of RIT Capital Partners. Maggie, thanks for joining me today.

Maggie Fanari, CEO of J. Rothschild Capital Management: Great. Thank you, Kyle. It’s a pleasure to be here. 

Kyle Caldwell: So, Maggie, you took over the CEO role in March 2024. Since then, performance has improved. But if we look at the five-year performance figure, there is a significant gap between the share price total return and the return of the underlying investments, the net asset value (NAV). Could you explain why there is that gap, and could you talk through recent performance? 

Maggie Fanari: Sure. So, just as you said, I started in 2024. Our three-year track record has improved quite a bit. But if I just get to the heart of your question, why does the five-year number feel disconnected from our one, two, and three-year very strong returns? The answer is that we had a tough 2022, like many, many other people. Actually, our discount also widened over that time. 

As a result, it is weighing down our five-year average, but over the last couple of years, those numbers, as you’ve noted, have significantly improved, and I certainly hope over the next two years that we’re going to have a very healthy five-year number. But it’s really that 2022 number that’s dragging down the five-year return.

Kyle Caldwell: As you mentioned, 2022 was a tough year. During that year, we saw inflation reach red-hot levels, and a series of interest rate rises. At the moment, the macro backdrop is that inflation is higher than central bankers would like it to be, and we’re in a higher-for-longer scenario with interest rates. How will the portfolio fare given this macro backdrop?

Maggie Fanari: We’re always paying attention to the macro backdrop, and when you have the ability and flexibility to have a diversified global portfolio, you want it to be resilient through different economic scenarios. So, a really strong growth market or if you get certain types of shocks, like we had a geopolitical oil spike shock earlier this year. 

Last year, we had tariffs and our portfolio held up quite well and outperformedthe market during those very difficult periods of time. 

Today, and we’ve noted this, we do think quite hard about inflation and how that could impact our portfolio. As a result, just through the diversification of thinking through a multipolar world, where we’ve positioned ourselves in AI, and the realisations we’ve had in the private portfolio, we think our portfolio should be quite resilient to an inflationary shock, or any kind of shock really, and the last two years really showed that we’ve been able to do that. 

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Kyle Caldwell: To try and rein in the discount, a series of measures have been taken, including a recent tender offer. Is there a particular target that the board has in mind for the discount? At the time of this recording, the discount stands at just below 22%. 

Maggie Fanari: Yes, so the tender is now completed, and it was very successful from that perspective. But, really, the tender is just [one thing in a] series of measures. 

As we look over the last couple of years, both myself and the board have been working quite hard to reduce the discount, and last year we started to see elements of that. 

Our share price was above our NAV, so the share price was up close to 17% on a total return basis last year. Our portfolio return, our NAV return, was about 13.5%. Then, this year, as of the end of August, our share price is also above our net asset return. So, again, with the discount coming in. 

So, the series of measures from us is: let’s look to offer liquidity to those who are seeking liquidity, let’s continue buying back our shares. And also let’s really focus on our shareholder engagement, our transparency with the market, and also really drive up our performance. 

And it’s really that combination of things we fundamentally believe will look to reduce the discount over time, and we think that’s working. 

Kyle Caldwell: In recent years, investment trusts have attracted the attention of activist investors. Are you concerned about this trend and are there ways to keep these activist investors at bay? 

Maggie Fanari: I wouldn’t look to keep a shareholder - if they were a shareholder - at bay necessarily. We get a lot of good feedback from our shareholders and as part of the series of steps we’ve taken to increase our transparency to the market, the way that we engage with the market and our performance, we’ll buy back our shares when the discount is too wide. We’ve just completed a tender, so we’re really doing all the things that perhaps some of these activists are asking other companies to do, but we’re doing them because we fundamentally believe they’re the right thing to do for our shareholders. 

Kyle Caldwell: A theme that the portfolio is playing is positioning for AI-driven innovation. Could you talk us through how you’re participating in that theme? 

Maggie Fanari: Yes. We’ve taken a very deliberate step that we would really like to invest in AI through our private portfolio. As a result, in the year before, we looked to sell a large portion of our software exposure that had been sitting in the public equities exposure, including some very long-time names like Microsoft Corp (NASDAQ:MSFT) and so on. 

Going back to your question, we want to make sure that we have a certain amount of exposure to AI to generate that growth for our investors. But we also don’t want have too much of it because there are really other exciting themes that we look to invest in like biotech and emerging markets and so on.

We’ve taken that deliberate step to invest - and not in the private portfolio. In the direct portfolio are some of great names like Anthropic, Databricks and Stripe. And through our fund partners, we also get that AI exposure. We look to think about our AI exposure sitting specifically in our private space. 

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Kyle Caldwell: Does the portfolio have much exposure to the so-called Magnificent Seven names? 

Maggie Fanari: We’ve had very little exposure to the Magnificent Seven. Our exposure is quite low and we only own one name, Amazon.com Inc (NASDAQ:AMZN), which is less than 1% of our portfolio. We really like it because it’s also on the consumer side. 

Part of our offering to shareholders is anyone can get investments in the Magnificent Seven, but from our perspective it’s really difficult for many shareholders or individuals to be able to get access to some of our fund partners like Thrive at Josh Kushner, where they were very early in OpenAI, or Green Oaks, or Founders Fund with Peter Thiel, and so on. And the companies that we invest in on the direct side are very difficult to [access].

Kyle Caldwell: What are your thoughts on a big question that many investors are grappling with, which is whether the world’s biggest companies have overspent on developing AI infrastructure? 

Maggie Fanari: There’s always [an issue] with any technological change, like the one that we’re seeing today, in that you need to build-out the CapEx to make it work. But what you are actually asking at the end is: do you believe that AI is here to stay? And if the answer is yes, then the CapEx makes sense and you’ll get a return on that investment. 

Personally, I think AI is one of the most transformational events that we have seen and that AI is here to stay. So, you need to have the CapEx build-out and then, ultimately, you will reap the benefits of that. 

But there was a question around, do you want to be invested in the companies that are building out the CapEx, or do you want to invest in the companies like Stripe and Databricks which are benefiting from the build-out of this CapEx? Our view is we tend to invest in the companies that are benefiting from the build-out of the CapEx.  

Kyle Caldwell: Given that the trust focuses on both growing capital and seeking to protect capital, what’s on the worry list at the moment? What would you say is the biggest concern that could cause stock markets to become more volatile? 

Maggie Fanari: When we run different scenarios and think about the world, we really think that the one to watch is inflation. We’re keeping a close eye on inflation because that could have an impact on macroeconomic growth, which we have seen has been very resilient and very strong, even with oil prices where they are today. But we continue to watch for inflation. 

Kyle Caldwell: And finally, Maggie, a question that we ask all fund managers we interview: do you have skin in the game? 

Maggie Fanari: Oh yes, a large portion of management’s compensation is very much in RIT shares. I’m happy to own [them] because at the end of the day I get access to, as I said, many of these investments that would be very difficult to access on your own. 

At RIT, every single employee is compensated and a shareholder in a RIT stock. And that’s very much in our view aligned to all our shareholders. 

Kyle Caldwell: Maggie, thank you for your time today. 

Maggie Fanari: Great, thank you so much. 

Kyle Caldwell: That’s it for our latest Insider Interview. As ever, we love to hear from you and you can comment on this video. For more Insider Interviews in the future, do hit the subscribe button and hopefully I’ll see you again next time.