Rockwood Strategic [LON:RKW] has been mentioned before in dispatches, but this GBP90.5m investment trust warrants closer attention.
Sat in the Association of Investment Companies UK Smaller Companies sector, it’s part of the London-based Harwood Capital Management group and was launched in 2015.
The fund is a value-orientated smallcap investor. It believes strongly in the growth potential of smaller companies when compared to their large-cap peers. This is encapsulated in the philosophy that ‘Elephants don’t gallop’ and will over the longer-term outperform the larger end of the market, due to the premium received for faster than average growth, an illiquidity premium and a risk premium for aspects such as immaturity and reduced funding options.
Now is the time for UK smallcaps
The company believes that now is the time for UK smallcaps, given the market’s relative underperformance when compared to the UK largecap sector and US market, creating plenty of value opportunities as the company believes that many smaller companies with great balance sheets and growth potential are unfairly undervalued by a cautious market.
Richard Staveley leads the investment team. He has been in the game for around a-quarter-of-a-century, initially working at Bradshaws and SocGen. He then co-founded River & Mercantile Asset Management in 2006, launching a UK Smaller Companies fund.
Seven-years later Staveley switched to Majedie Asset Management before moving to Gresham House in 2019. In 2021 Harwood Capital were appointed the new investment manager for Gresham House Strategic, which changed its name to Rockwood Strategic, and Staveley was subsequently re-appointed as lead fund manager.
He is assisted by Nick Mills, who has been with the company since 2019. Staveley is a small-cap champion, having spent the majority of his professional life researching and investing in UK smaller companies. He believes that the sector, which has underperformed the overall market since the Covid pandemic, is due a renaissance imminently.
He argues: “The UK discount started widening following the calling of the Brexit Referendum in 2016 and has since increased with investor flows chasing the momentum of US technology mega-caps. Relative performance has, notably, recently finally started to invert. Timing is auspicious.”
Concentrated core portfolio
Rockwood Strategic looks for investments in securities that can generate a 15% IRR over the medium-to-long-term, principally through capital appreciation. It would typically expect a holding period of at least three-to-five-years. The investment management teams seek companies where securities are valued at less than the team’s view of their intrinsic value. Staveley and his team look for opportunities for value to be unlocked or created through strategic, management or operational changes, typically leading to improved returns, profits and growth.
For larger, core holdings Staveley and team will seek to acquire influential block stakes targeting between 5% and 25% of the core holdings issued ordinary share capital and in conjunction with other funds run by the investment management team when additional capital is needed.
The Rockwood fund follows an active investing policy and invests predominantly in a diversified portfolio of publicly listed or quoted UK equities capitalised at under GBP250m at the point of investment. Rockwood retains the flexibility to invest in non-listed investments in certain situations that will not cumulatively exceed 15% of Net Asset Value at the time of any investment.
Staveley and team will invest most of the fund’s capital in a concentrated portfolio of up to ten core positions. Initial holding weightings are expected to represent between 4% to 15% of NAV at the time of investment. That said, the fund has the discretion to invest up to 20% of NAV in a single holding if a suitable opportunity arises.
The remainder of the portfolio is expected to be invested in a focused group of between 15 to 25 investments. These will meet the investment criteria, but are where the opportunity to establish a core size investment hasn’t arisen yet. Or, more liquid corporate recovery or ’special situation’ opportunities where the targeted return objectives can be expected, but where a large stake is not deemed necessary to influence or generate change.
Top performer consistently
Over one year (to 9th September on a share price total return basis) the fund returned +44.75% against a sector average of +23.1%. This places it second in a sector of 24 funds, behind Crystal Amber [LON:CRS], which is in a wind-down process.
Over five-years, Rockwood is top of the tree with a stonking +219.7% against a sector average of +32.2%. By comparison the next-best fund was the Oryx International Growth [LON:OIG] fund, with a +86% return. Over a decade Rockwood was again top performer offering a +282.4% return, against a sector average of +109%.
Top five holdings as at 30th June 2024
| Investment | Sector | Weighting |
| Funding Circle LON:FCH | Financial Services | 13.1% |
| RM Education Services LON:RM. | Consumer Services | 11.6% |
| Filtronic LON:FTC | Aerospace & Defence | 10.6% |
| M&C Saatchi Media LON:SAA | Media & Communications | 7.3% |
| Trifast Industrials LON:TRI | Industrials | 6.9% |
Source: Harwood Capital
The fund has an ongoing charge of 1.58% and trades at a discount to premium of 2.06%.
Rockwood Strategic’s exceptional performance over the past year and multiple-year periods underscores its ability to navigate the UK small-cap market effectively. Staveley’s experienced team’s focus on value-oriented investments, and an ability to identify undervalued companies with growth potential have contributed significantly to its success. As the UK small-cap market continues to evolve, Rockwood Strategic remains well-positioned to capitalise on opportunities and deliver attractive returns to its investors.
