Rockwood Strategic 18 September 2024
Disclaimer
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 of Rockwood Strategic (RKW), Richard Staveley, looks to take advantage of the lack of research and limited institutional interest at the lowest end of the UK’s market-cap spectrum to find overlooked companies trading at significant valuation discounts to their intrinsic value and long-term potential. The manager often looks for companies that are going through challenging periods but have strong recovery potential or strategic initiatives that might unlock value. He will take large positions in these stocks, leading to a concentrated portfolio, which he manages with a highly active approach. This involves instigating change to unlock value for the benefit of all shareholders (see Portfolio).
This approach has delivered very strong Performance, with RKW one of the best performing trusts in the smaller companies sector over the long term. Richard has been manager since 2019, with the exception of a short period of corporate activity (see Management). Performance continues to be very strong, leading to excellent returns over both the near and longer term.
The strong performance has helped lead to the trust’s Discount narrowing significantly, and the shares moving to a sustained premium from 2023 onwards. The board has been active in managing this through ongoing share issuance. Authority to continue this was renewed in July 2024 to allow for further issuance, allowing the trust to grow and to help keep the premium close to NAV.
The manager has been using this share issuance to buy several new holdings, as well as the proceeds of M&A activity, after a number of holdings were bid for in late 2023 (see Performance). This outcome is typical of the manager’s process, which includes a full assessment of possible exit strategies when the initial investment is made. The portfolio now consists of 22 holdings.
RKW’s sector-leading performance is the standout attraction of this trust in our opinion. Richard’s approach of finding out-of-favour companies at the lowest end of the market-cap spectrum and benefitting from their turnaround has repeatedly provided positive returns over multiple time periods. He uses the liquidity risk in this part of the market to his advantage by taking large stakes, often alongside existing investors minded to change, and looking to instigate a catalyst to generate shareholder value. This has meant that not only has the trust delivered stellar performance, but also means the portfolio will look completely different to other trusts in the peer group (see Portfolio).
Whilst stock-specific factors will be the primary driver behind performance, the current market outlook could also be a positive for the trust. Despite a recent pickup, we believe that UK smaller companies remain an under-owned and undervalued asset class. This means it may offer an alternative to the crowded trades seen elsewhere in the market, with sentiment showing signs of improving as macro-conditions continue to improve and interest rates begin to fall. We believe Richard’s high conviction portfolio would benefit well from an improvement in sentiment, as a positive share price move in just one or two holdings can have an outsized impact on NAV, as has been the case in 2024, leading to the exceptional relative and absolute Performance.
Bull
- Performance over the near and long term has been exceptional
- Portfolio is likely to be highly differentiated to peer group and index
- Potential recovery in the sector could provide a tailwind to performance
Bear
- Trust levies a performance fee, which could be off-putting for some investors
- Portfolio is highly concentrated and has holding liquidity risk
- Shares trade at a premium rating, in contrast to most peers that are at a discount