Results analysis: Rockwood Strategic

• Rockwood Strategic has released its financial results for the year ending 31/03/2024. Over the year, the trust saw its NAV increase by 5.1% on a total return basis, which compares to the unweighted average total return of 7.2% for the AIC UK Smaller Companies sector. The trust has no formal benchmark, though the two primary comparators, the FTSE AIM All Share Index and the FTSE Small Cap (ex-Investment Trusts) returned -8.6% and 7.1% respectively.
• Performance has been driven by manager Richard Staveley’s concentrated portfolio, built through bottom-up stock selection. Whilst the twelve months covered by the results has seen some challenging periods for the wider UK small cap market, a rally in late 2023 onwards has contributed to the trust delivering positive absolute returns, which has continued post period end.
• Strong share price performance meant the trust finished the year at a 1.9% premium, having begun the period at a discount of 7.1%. The premium rating has allowed the board to issue shares to help grow the trust, with £11.5m raised in the year. This, alongside the good performance, meant net assets grew to £64.3m at the end of the year, up from £50m in March 2023.
• The manager has been active in portfolio management. Four holdings were sold entirely, with another delisted. All sales delivered positive total returns for the trust. There were five new additions in the year, taking the portfolio to 19 companies, seven of which were ‘core’ positions, and 12 ‘springboard’. The top ten accounted for 64.3% of NAV. 
• The positive momentum of the portfolio continued post period end, with NAV rising by 19.1% to 14/06/2024 following strong performance in a number of holdings. This contributed to the trust becoming one of the best long-term performers in the sector over the five years to 14/06/2024.
• Chairman Noel Lamb had a positive outlook, stating “the future for this specialist strategy is positive, the outlook for the portfolio is bright and that the opportunity to meet our target returns in this generally over-looked part of the UK stock market is achievable”.

Kepler View

These annual results show that Rockwood Strategic (RKW) has delivered admirable returns in a challenging period, in our opinion. Manager Richard Staveley has delivered positive absolute returns in a year where the UK smaller companies sector saw significant outflows and questions were raised over the future for the sector, which we believe demonstrates the benefits of a highly concentrated, stock selection approach.

Despite RKW’s good absolute return, we believe the results don’t reflect the full journey of UK stocks throughout the year. The market fell sharply from September 2023 onwards, hitting a nadir in October before recovering through to March 2024. This momentum has continued in the period following the statement end, which Richard has captured in RKW, having returned over 19% from the end of the financial year in March to mid-June 2024 compared to the unweighted sector average of 6.4%. This has supported the trust’s long-term numbers too, with RKW now the best performing UK smaller companies investment trust over five years to 14/06/2024.

Despite the highly concentrated portfolio, there have been a number of changes to the holdings. Richard has sold four stocks in the year, all as a result of M&A approaches, generating realised IRRs of between 2% and 94% per annum. One further holding was exited following a de-listing. On the purchases, there were five new holdings from across a range of industries, including a mining company and a television production company. This has taken the total number of holdings to 19, consisting of 12 smaller ‘springboard’ positions and seven ‘core’ positions.

The shares of RKW have performed very well throughout the financial year, leading to shareholder total returns of 15.4%. This has meant that the trust has moved from a discount of 7.1% at the beginning of the reporting period, to a premium of 1.9% at the end. The board has looked to manage the premium, as well as grow the trust, by issuing shares worth c. £11m. The 20% issuance limit has now been reached, though we understand the board will seek to extend this limit at the AGM at the end of July.

A combination of the share issuance and strong performance has led to a growth in the assets of the trust in the year from £50m in March 2023 to £79m as at 14/06/2024. This means the NAV has now grown by c. 94% since Richard regained the management of the trust in April 2022, which we believe is a clear demonstration of the success of the strategy. The increased scale will contribute to lower overall charges, as fixed costs will be spread across a broader asset base, further reinforcing the attractions of this very different strategy.

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