ROCKWOOD STRATEGIC raking in huge returns from unloved small corporations

The manager of stock market-listed fund Rockwood Strategic goes searching for investment minnows in waters few others fish in: the UK ‘micro-cap’ sector.

It’s a pond, embracing some 500 companies with market capitalisations of below £250 million, that numerous investment houses have deserted in recent years. But not Richard Staveley, who runs the £220 million investment trust with assistant Nicholas Mills.

Staveley believes there is money to be made from buying micro-cap public companies, typically when they are struggling, and then holding them as they recover.

The recovery, usually involving a change of management, new board members or a restructuring of the business, takes between three and five years to come through – and Staveley’s aim is to double the value of the trust’s investment by the time he exits.

It’s an approach he has honed over 25 years of running smaller companies’ funds. He now works for Harwood Capital Management which has £2 billion of assets under its wing – including Rockwood and four other investment trusts.

Rockwood’s performance indicates that Staveley has come up with a winning formula.

Over the past five years it has more than doubled shareholders’ money, generating investor returns of 131 per cent. To put this number into perspective, the average UK smaller companies’ investment trust has delivered an equivalent return of 32 per cent.

‘We go against the herd,’ says the fund manager. ‘While everyone else is looking at artificial intelligence, gold and crypto currencies, we search out troubled UK companies which we believe can be turned around.’

The fund is invested in just 25 businesses – all are public – with the top-ten holdings accounting for more than 60 per cent of assets.

Staveley says that his investments fall into two broad camps.

First, there are companies in the process of turnaround when he makes an investment – and then he quietly sits on the sidelines as they transform.

In this group sits outsourcer Capita, which it bought in May 2024 when the shares were trading at £2.14. As a result of an overhaul – in Staveley’s words, ‘getting rid of a lot of mess’ – Capita is now in better shape, notwithstanding its acute problems administering the Civil Service pension scheme.

Its shares are priced just below £3.60, and Staveley believes there is the potential for further upside. Although its market value is now £405 million, Staveley is content ‘to run with our winners’ and believes it could break through £1billion.

The second camp comprises companies where Rockwood Strategic’s approach is more hands on, being part of a shareholder group which agitates for change.

In 18 of the businesses it has stakes in, the trust owns more than 5 per cent of the shares.

This enables Staveley, on behalf of the trust, to request an extraordinary general meeting if he believes that it will speed up transformation – which can sometimes take a while.

Rockwood bought a stake in communications company M&C Saatchi five years ago at a share price of around 80p. In 2022, the business was unsuccessfully bid for twice, while late last year a bid for an overseas division was rejected. Staveley is confident that, in the near future, active engagement with M&C Saatchi’s board will result in ‘value being realised for shareholders’. The shares now trade at £1.26.

The trust’s total annual charges are high at 1.83 per cent, but are value for money if the trust keeps delivering stellar performance. Its market ticker is RKW and the identification code is BRRD5L6.