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David Kimberley
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Updated 24 Nov 2023
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Earlier this week Rockwood Strategic (RKW) released its results for its most recent half-year period, which came to a close at the end of September. Performance over that period was not amazing but it was something of a blip for a trust that has otherwise delivered exceptional returns for shareholders.

Over one, three, and five year periods up to 22/11/2023, RKW is the top performing UK small cap trust. That it has delivered share price total returns of close to 30% in the last 12 months, when the UK, smaller companies, and investment trust sectors have all been so out of favour, is remarkable.

RKW takes a fairly unique, private equity-esque approach to markets, something which readers can learn more about in our latest research note. But one of the key points manager Richard Staveley makes is that the companies he invests in receive little to no research coverage and are effectively uninvestable for larger funds, usually due to liquidity and size constraints.

This comes with its own challenges. For instance, one of RKW’s largest holdings had a bid-ask spread of almost 8% on Friday afternoon - a sign of the risks you face when entering or exiting a position in companies of this size.

Nonetheless, the idea that you can outperform more easily in areas of the market that are not well covered or invested in by peers is a logical one. It’s also an argument that the managers of Ashoka India Equity (AIE) have made repeatedly, noting that India has been one of the markets that active managers have delivered the highest level of outperformance in over the last couple of decades.

AIE has the largest on the ground research team in India among its peers in the investment trust sector and the managers believe this has been key in their ability to deliver strong outperformance, both relative to other trusts and AIE’s benchmark.

But as the first of those points implies, not all trusts are made equal and the potential for informational edge does not necessarily translate into strong performance. If it did then presumably every trust investing in an under researched market would deliver strong returns.

For RKW, that companies are under researched seems more an opportunity rather than the driver of returns. In other words, the lack of coverage is part of what has enabled the managers’ strategy to deliver superior returns, rather than it being the causal factor.

Richard runs an extremely concentrated portfolio, often takes an active role in enacting change at portfolio companies, and looks for firms that can deliver an IRR of 15% over 3 – 5 year time frames. Doing this would be impossible in the large cap space.

AIE is similar in the sense that the managers take full advantage of the potential that exists for an informational edge as their research team conducts thousands of company meetings every year. Indeed, along with a proprietary cash flow analysis system, corporate governance is one of the key points that the managers highlight as being a determinant of future returns.

AIE and RKW are, of course, not guaranteed to continue delivering strong returns in the future. Nonetheless, the results they have delivered over the last five years are an indication that a dearth of information can create opportunity, even it’s not enough on its own to guarantee returns.

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