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Strategic Report Chairman s Statement 3 Our Strategy & Business Model 5 Investment Review 8 Investment Portfolio 12 Principal Risks & Viability 15

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for the year ended 31 December 2016 Contents Company Highlights 1 Strategic Report Chairman s Statement 3 Our Strategy & Business Model 5 Investment Review 8 Investment Portfolio 12 Principal Risks & Viability
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for the year ended 31 December 2016 Contents Company Highlights 1 Strategic Report Chairman s Statement 3 Our Strategy & Business Model 5 Investment Review 8 Investment Portfolio 12 Principal Risks & Viability 15 Governance Board of Directors 20 J. Rothschild Capital Management 23 Corporate Governance Report 24 Audit and Risk Committee Report 29 Directors Remuneration Report 32 Directors Report 43 Financial Statements Consolidated Income Statement and Consolidated Statement of Comprehensive Income 48 Consolidated Balance Sheet 49 Parent Company Balance Sheet 50 Consolidated Statement of Changes in Equity 51 Parent Company Statement of Changes in Equity 52 Consolidated and Parent Company Cash Flow Statement 53 Notes to the Financial Statements 54 Independent Auditors Report 79 Other Information Investment Portfolio Reconciliation 89 Historical Information and Financial Calendar 90 Directory 91 Company Highlights Strategic Report Governance Financial Statements Other Information Company Highlights Corporate Objective To deliver long-term capital growth, while 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 Policy To invest in a widely diversified, international portfolio across a range of 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. Financial Summary 31 December December 2015 Change Net assets 2,692m 2,441m 251m NAV per share 1 1,730p 1,573p 157p Share price 1,885p 1,681p 204p Premium/(Discount) 9.0% 6.9% 2.1% Dividends paid 31.0p 30.0p 1.0p Gearing 14.7% 12.1% 2.6% Ongoing Charges % 0.68% 0.74% -0.06% NAV per share total return 12.1% Share price total return 14.2% RPI 2 plus 3.0% 5.5% MSCI All Country World Index % Performance History 1 Year 3 Years 5 Years 10 Years Share price total return 14.2% 58.7% 71.2% 119.4% NAV per share total return 12.1% 32.7% 65.9% 99.6% RPI plus 3.0% 5.5% 15.0% 28.9% 75.7% MSCI All Country World Index 18.9% 34.0% 86.0% 88.5% Performance Since Inception 2,400% 2,000% RIT NAV per share total return ACWI 4 RPI plus 3% 1,600% 1,200% 800% 400% 0% Diluted net asset value per share with debt held at fair value. 2 Retail Price Index. 3 The MSCI All Country World Index (ACWI) we have adopted is a total return index and is based on 50% of the ACWI measured in Sterling and 50% measured in local currencies. 4 The ACWI in the chart is based on the capital-only index in Sterling prior to the introduction of total return indices in December Thereafter we have used the total return index based on 50% of the ACWI measured in Sterling and 50% measured in local currencies. RIT Capital Partners plc Report and Accounts December Strategic Report Company Highlights Strategic Report Governance Financial Statements Other Information Chairman s Statement Lord Rothschild, OM GBE Iam pleased to report that your Company s net asset value per share during 2016 increased to 1,730 pence, representing a return of 12.1%. Against a background of daunting uncertainty and political turmoil, I am pleased to report that your Company s net asset value per share during 2016 increased to 1,730 pence, representing a return of 12.1%. Your Company s shares traded at a premium which averaged 4.6% during the course of the year and total shareholder returns amounted to 14.2%. Your Company s net assets increased by 299 million (before dividends of 48 million) to 2,692 million, an all-time high. There has been a further modest increase of 1.3% in January, with the month-end NAV at 1,753 pence. Over the last three and five calendar years, the shareholder returns have amounted to 59% and 71% respectively. Our investment policy throughout 2016 has been one of continuing caution with an emphasis on capital preservation. Quoted equity exposure was reduced, averaging 46% over the year, and we cut our allocation to Sterling, ending the year at 24%. We continue to hold gold and gold mining shares amounting to 6% of the portfolio. On equities, some of our best performing managers of recent years produced negative results in the year under review. Against this, your Company increased its asset allocation to Absolute Return and Credit which delivered satisfactory results, including for example Eisler Capital, the macro manager where we were a founder investor. Overall our focus has been to invest in companies which stood to benefit from policymakers continuing efforts to reflate economies, such as US financials and the industrial sector. Private investments, both direct and those managed by third parties, met our expectations, for example, benefiting from the sale of our defensively structured investment in Williams & Glyn, which generated a 1.8x return over three years. Two significant new investments were made during the course of the year into Acorn and CSL. Acorn is one of the world s largest coffee businesses incorporating DE Master Blenders, Keurig Green Mountain and Mondelez s former coffee business. CSL is the UK s second largest alarm signalling company. Both were co-investments with industry partners with whom we have developed close relationships Acorn alongside BDT Capital and CSL with ICONIQ Capital. On currencies, we became cautious on the outlook for Sterling over the course of the year, increasing our exposure to currencies outside the UK, in particular the US Dollar. This represents a continuation of RIT s longstanding policy of an unconstrained approach to currency positioning. Timing is paramount in achieving investment performance and our 2016 returns reflect a cautious approach in a period of increasing uncertainty. Since the last World War, we have enjoyed some 70 years of patiently crafted international cooperation, which is now threatened. Against this deeply worrying geo-political situation one can point to a number of positive investment factors, for example in the US, the proposed tax reduction for companies and individuals, reforms of an over-regulated system and increases in fiscal and infrastructure expenditure. These, however, come at a time late in the business cycle, when the labour market is close to full employment, with wage increases up by some 4% over the last few months. Valuations are at the high end of their historical range, inflation is returning and in these circumstances, it is likely that interest rates in the US will rise meaningfully. The impact on China of either straightforward tariffs or of a border-adjusted tax would be negative, at a time when Chinese economic momentum is fading and when it has to deal with the problem of misallocation of capital on a huge scale. China will be choosing between becoming a more open or closed society and while its economy transitions from industrial growth and exports to being more consumer-led. We are all conscious of the risk of the European Union disintegrating following last year s Brexit vote and in having to deal with the problem of migration. The character of the European trading block remains complex, unpredictable and in need of reform. We should take into account however that the most significant forecast improvement in growth for 2017 is in Europe and that its stock markets are relatively undervalued. RIT Capital Partners plc Report and Accounts December Chairman s Statement In the UK, investors will be waiting for greater clarity about the outcome of Brexit negotiations and the risks of upheaval which will arise in leaving the EU. Short-term, the UK economy has performed surprisingly well. We should bear in mind however, that the World Bank and others have recently forecast a slowing of growth in the current year and beyond while the current account deficit remains daunting. In these circumstances, our positioning is likely to remain defensive, with an emphasis on returns uncorrelated to the overall performance of equity markets. We have increased our exposure to situations which should benefit from an environment of higher inflation, for example by being short of Government Bonds after a long period of declining inflation and low interest rates. The success of our asset allocation depends on capturing the right market themes, the excellence of our external managers, stock selection, private investments and a continued emphasis on Absolute Return and Credit strategies. At this time of upheaval and uncertainty, our investment portfolio will continue to be well diversified. There could well be a period ahead of us when the avoidance of risk is as high a priority as the pursuit of gain. Dividend We are intending to pay a dividend of 32 pence per share in 2017, some increase above the current rate of inflation. This will be paid in two equal payments of 16 pence in April and October. We intend to maintain or increase this level in the years ahead, subject to unforeseen circumstances. Rothschild 27 February Report and Accounts December 2016 RIT Capital Partners plc Company Highlights Strategic Report Governance Financial Statements Other Information Our Strategy & Business Model Introduction This section aims to provide a clear and succinct overview of our strategy and business model, in particular: what we are trying to achieve (Strategic Aims); how we go about it (Investment Approach); how well we have done (Measuring Performance and KPIs); how we structure our remuneration (Incentive Structure); and our Governance and Group Structure. Strategic Aims Our strategic aims are best illustrated by our Corporate Objective: to deliver long-term capital growth, while 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. We believe this accurately reflects our long-term aims. However, a degree of clarification may assist shareholders in understanding what we are trying to achieve for them over time in particular because we differ from many other large trusts who always aim to be fully invested in quoted equities. The most important objective is long-term capital growth while preserving shareholders capital. The essence of our investing DNA is about protecting and enhancing shareholders wealth. There may be times when we will deliberately place protection of shareholders funds ahead of growth as happened during the latter stages of the dot-com era and also in the run up to the most recent financial crisis. However, we recognise that such market timing is unlikely to be sustainable in the long term. Since your Company s listing in 1988, we have participated in 75% of the market upside but only 39% of the market declines. This has resulted in our NAV per share total return compounding at 11.5% per annum, a meaningful outperformance of global equity markets. Over the same period the total return to shareholders was 12.9% per annum. O ver the last three years shareholders have benefited from a total return of 59% compared to 34% from the market. We believe that our active management of equity exposure, combined with early identification of opportunities and themes across multiple asset classes, is more likely to lead to long-term outperformance. We would hope to display healthy participation in up markets, and reasonable protection in down markets. Over time, this should allow us to compound ahead of markets throughout the cycles. Indeed, since your Company s listing in 1988, we have participated in 75% of the market upside but only 39% of the market declines. This has resulted in our NAV per share total return compounding at 11.5% per annum, a meaningful outperformance of global equity markets. Over the same period the total return to shareholders was 12.9% per annum. Investment Approach The strategic aims are expressed in more practical terms in our Investment Policy: to invest in a widely diversified, international portfolio across a range of 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. It is this policy which guides us as we manage your portfolio. So, while we retain at our core an equity bias, we nonetheless have the freedom to invest your portfolio across multiple asset classes, geographies, industries and currencies. This has been the basis of our style over many years combining thematic investing with individual securities, and private investments with public stocks. The long-term success of your Company has been drawn from a distinctive blend of individual stocks, private investments, equity funds and currency positioning, all overlaid with macro exposure management. We believe the extent of our global reach and network of contacts allows us to maximise our ability to deploy capital effectively. We seek to capitalise on an in-house investment team working closely with our core external managers, the majority of whom are closed to new investors. RIT Capital Partners plc Report and Accounts December Our Strategy & Business Model Above all, our approach is long term. For example, in relation to private investments, we are not constrained by the typical industry model of a limited life partnership. This means we can hold such investments over an extended period and choose to realise at an optimum time. On quoted investments, we aim to avoid being forced sellers of stocks if we are comfortable with their underlying fundamentals, even if it means incurring shortterm losses. Measuring Performance and KPIs While we believe our success can only really be measured over the long term, we also recognise that providing shareholders with a comparator against which to measure our performance over shorter periods is important. The strategic aims highlighted on the previous page, reflect the desire to produce real capital growth and to exceed markets over time. These are reflected in the following targets or Key Performance Indicators (KPIs): 1. Absolute Outperformance: NAV total return in excess of RPI plus 3% per annum; 2. Relative Outperformance: NAV total return in excess of the ACWI; and 3. Share price total return or Total Shareholder Return (TSR). The first of these KPIs reflects the desire to produce strong absolute returns with a meaningful premium above inflation. The second reflects our unconstrained global investment approach and the desire to outperform markets. Consistent with many investment companies, we use the ACWI which we believe is an appropriate comparator for our global, unconstrained approach. On currency, we use a blended index consisting of 50% of the ACWI measured in Sterling and 50% of the ACWI measured in local currencies. However, we also retain the flexibility to take an unconstrained approach to our currency positioning; for example, in early 2008 we had no exposure to Sterling ahead of its significant fall in value later that year. Our wholly-owned subsidiary, J. Rothschild Capital Management Limited (JRCM), is tasked with managing the portfolio to deliver a NAV return. Ultimately however, the return to our shareholders is through share price growth and dividends. We therefore also consider the TSR as our third KPI. We believe the extent of our global reach and network of contacts allows us to maximise our ability to deploy capital effectively. We seek to capitalise on an optimal blend of an in-house investment team working closely with our core external managers, the majority of whom are closed to new investors Performance I was pleased with our performance in 2016, in particular against the background of the uncertain and volatile environment. The NAV total return for the year was 12.1%. This compared to our first KPI (RPI plus 3%) at 5.5%, an outperformance of 6.6% points. The relative KPI (the ACWI), returned 18.9% over the year. At the same time, our premium increased from 6.9%, to end the year at 9.0%. As a result, the TSR over the year (our third KPI) reached 14.2%. If I look back over the last three years, I am gratified that, notwithstanding our somewhat cautious stance, we have broadly kept pace with markets. On an annualised basis, our NAV total return over that period was 9.9% compared to the ACWI at 10.2%. Shareholders have benefited from a total return of 59% compared to 34% from the market. While our Chairman has continued to provide the benefit of his extensive experience, due credit must also be given to our CIO, Ron Tabbouche, who has taken a carefully structured approach to the portfolio, while also bringing enhanced focus and conviction. As ever, it is a team effort and I would like to put on record my continuing thanks to our CFO, Andrew Jones and COO, Jonathan Kestenbaum for their unfailing efforts on your behalf. Equally important, our business only functions efficiently and effectively thanks to all of our employees across each and every function. Incentive Structure Following a careful review of the remuneration policy for Directors of the Company (the Remuneration Policy) by the Remuneration Committee, including consultation with major shareholders, the Board has concluded that it will not propose any changes to the Remuneration Policy. This will be submitted to shareholders for the next triennial binding vote at our 2017 Annual General Meeting. 6 Report and Accounts December 2016 RIT Capital Partners plc Company Highlights Strategic Report Governance Financial Statements Other Information Our Strategy & Business Model Our Remuneration Committee believes the Remuneration Policy continues to provide an appropriate incentive structure to attract, motivate and retain the high-quality individuals we need to deliver our long-term strategic aims. The Remuneration Policy is designed to align with, and reinforce, these strategic aims. The Chairman of RIT, as well as management and key staff of JRCM, participate in two principal plans: 1. The Annual Incentive Scheme (AIS); and 2. Long-Term Incentive Plan (LTIP). The AIS is designed to incentivise staff through a share in the total NAV outperformance against the Absolute Outperformance hurdle and the Relative Outperformance hurdle. This is measured annually and includes longer term features such as a three-year high water mark as well as significant deferral into RIT shares. In addition to this formulaic pool, AIS awards are also made for individual performance against qualitative measures. The Remuneration Committee retains the ability to clawback elements of previous awards if necessary. Payments under this scheme are capped at 0.75% of NAV or 0.25% if the NAV has declined. The second main aspect of the remuneration approach is an LTIP which provides a longer term incentive of up to 10 years using Share Appreciation Rights (SARs), which vest if RIT s TSR is above the hurdle of RPI plus 3.0% per annum over three years. Our other operational subsidiaries GVQ Investment Management Limited (GVQ) and Spencer House Limited (SHL) have incentive schemes tailored to their respective businesses. In reviewing the overall incentive structure and practice, the Remuneration Committee determines the appropriate balance between short-term and long-term aims, as well as the need for robust risk management. Further details of remuneration are provided in the Directors Remuneration Report on pages 32 to 42. Governance and Group Structure Our Chairman, Lord Rothschild, is responsible for the leadership of the Board and the Company. RIT is a selfmanaged investment company and the management of the investment portfolio has been delegated to JRCM, a subsidiary. JRCM is also responsible for the administration of the portfolio as well as acting as corporate company secretary. JRCM is also chaired by Lord Rothschild, with the day-today running of the business under the management of an Executive Committee led by myself as CEO. JRCM executives represent RIT's interests on the
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