Rockwood Strategic 14 September 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Rockwood Strategic. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Manager Richard Staveley takes a value-orientated approach when constructing a portfolio for Rockwood Strategic (RKW). He looks to capitalise on the lack of research at the smallest end of the market cap spectrum in order to profit from the extreme price inefficiencies that exist as a result. He regularly targets companies below £150m market cap as these are often overlooked by other investors from which he has delivered strong Performance.
Richard primarily focusses on turnaround situations where there is scope for material profit and valuation recovery. He creates an exit strategy within the investment case and identifies the required catalysts for change. The strategy typically buys meaningful shareholder stakes, often well in excess of 5%. These provide the basis for constructive engagement where Richard will offer advice to help create value for shareholders, ensure catalysts are recognised, and eventually have a material influence on the outcome of the business. To do this effectively, he maintains a highly concentrated portfolio of c 20 companies split between ‘core’ and ‘springboard’ positions. These are backed with conviction, where the largest positions can be over 10% of the portfolio meaning each can have a significant impact on returns (see Portfolio).
The trust has had an eventful history, though this has now settled, with the manager and strategy in place for a number of years albeit with a short hiatus (see Management). This approach has been supported by the parent group and manager through a considerable shareholding. RKW has also delivered strong returns for shareholders under Richard’s strategy which is primarily due to realised returns from several individual stocks, although raised cash levels in market falls will have had an impact. That being said, RKW is one of the best-performing trusts in the UK smaller companies sector since the manager took over, which may be reflected in the considerable narrowing of the Discount.
In a populous sector, we believe RKW stands out by offering a genuinely differentiated approach, that means it owns a portfolio of companies that are unlikely to be owned elsewhere (see Portfolio). Richard’s focus on the smallest companies in the market, selected with a valuation mindset, means that the factors driving performance are likely to be different to what can be found elsewhere in the peer group, or from an investment in a tracker. As such, we believe RKW could be considered as a complementary holding to balance more quality growth-focussed peers, as well as being attractive in its own right.
Not only has this differentiated approach led to a unique portfolio, but it has led to sector-leading Performance too. This performance hasn’t just been driven by a buy-and-hold approach seen elsewhere, but through constructive engagement by Richard and the experienced team at Rockwood (see Management). There have been higher cash levels though that will have contributed to relative performance in falling markets, but on the whole, we believe the trust is less reliant on market forces to drive returns as the manager can help instigate a performance turnaround, including through M&A activity which can be supported by the flexibility of the wider Harwood group, albeit we understand with strict rules in place. As such, we believe the trust can genuinely provide good performance in a variety of market backdrops. This is supported by the highly concentrated nature of the portfolio, meaning success in just one holding could have a material impact on the returns of the trust.
- Strong performance since manager and strategy inception
- Highly differentiated approach leading to a unique portfolio
- Both manager and the supporting team are specialists in this market segment
- Concentrated, high-conviction portfolio can add risk
- Micro-cap investments can struggle from liquidity issues
- The trust charges a performance fee which may not appeal to some investors