UK Small Caps: Opportunity, Value, and Constructive Engagement with Richard Staveley

UK Small Cap Market Underperformance

• 📉 The UK AIM market is down 37% and the FTSE Small Cap index is negative over the last four years, despite a long-term historical outperformance of small caps globally.
• 💡 This prolonged underperformance is seen as a strange and elongated phase, creating potential for mean reversion.
• 🎯 Younger investors may not have experienced the historical outperformance of small caps, leading to a lack of interest.

Factors Affecting Small Cap Attractiveness

• ⚠️ Concerns about liquidity are a major factor, exacerbated by the consolidation of wealth managers and concentration of funds.
• 🏦 The rise of passive investing tends to favor larger companies, while the growth of private equity draws capital away from listed smaller companies.
• 📈 While large caps like the FTSE 100 have seen significant gains, smaller companies remain unattractive to many investors.

Rockwood's Differentiated Investment Strategy

• 🎯 Rockwood focuses on stocks with the potential to double in value over 3-5 years, targeting a 15% annual return.
• 🏦 The portfolio is highly concentrated, with the majority of capital in the top 10 holdings (around 62-63%) and only 25 holdings in total.
• 💡 This concentrated approach is enabled by Rockwood's structure as a permanent capital investment trust, allowing for longer-term investment horizons without liquidity constraints.
• 🔍 Rockwood specifically targets companies below £250 million market cap, viewing them as more inefficient and offering greater potential for information advantage.

Value Investing and Constructive Engagement

• 🌱 Rockwood is an unashamedly value investor, benefiting from the return of interest rates to more normal levels which supports this style.
• 💰 Value is defined by focusing on a business's free cash flow generating ability in the near term, with a significant portion of the portfolio trading at a discount to book value.
• 🤝 The firm employs constructive engagement, taking stakes and actively working with management and other shareholders to catalyze change and unlock value.

Current Portfolio Highlights and Future Outlook

• 🚀 A significant winner has been Filtronic, supplying components for SpaceX's Starlink satellite platform.
• 💡 RM, an education business focused on assessment and digitalization, is a key holding with potential for significant value unlock through divestment of non-core divisions.
• 📈 Capita, a business process outsourcing company, is seen as a turnaround story with potential to double or triple as it leverages AI and its public sector contracts.
• 📊 The UK market has all the ingredients for a rebound: low valuations, reduced seller base, low leverage, and attractive interest rate environments, awaiting government catalysts like ISA reforms.