November 12, 2025 • 39 mins
Merryn Somerset Webb sits down with Richard Staveley, manager of the Rockwood Strategic, to unpack why UK smaller companies are so unloved—and why that may be a big opportunity. Richard explains Rockwood’s playbook: concentrated, benchmark-agnostic, value investing with hands-on “constructive engagement” to unlock change. They cover liquidity myths, the impact of passives and private equity, and where he sees near-term catalysts—plus what could reignite IPOs and domestic flows (think ISAs, pensions, and momentum).
Don't forget to sign up for our live podcast taping in London on November 27:
https://go.bloomberg.com/attend/invite/post-budget-merryn-talks-money/
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:17):
Welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Merrit Sunset
Web and in this episode we are going to focus
on UK smaller companies. Now, any regular listener to this
show will know that John and I often talk about
why you should be invested in smaller companies. They have
a long term record of outperforming. At the moment, particularly
(00:39):
in the UK, they are extremely inexpensive. There's a lot
of potential there for mean reversion and quite a lot
of growth that we are simply not showing enough interesting
small caps. Despite all these things, are still described in
the UK as one of the most unloved sectors in
the world. Why is that? What's going on? When might
(01:00):
it change? We have got the perfect guest with us
to discuss that. It is Richard's Stavely, manager of the
Rockward Strategic Investment Trust, which focuses entirely on very small
companies in the UK.
Speaker 3 (01:13):
Richard.
Speaker 2 (01:13):
Welcome to Maren Doalks Money.
Speaker 3 (01:15):
Thank you very much, Marin, great tos be speaking to you.
Speaker 2 (01:18):
Okay, now, Richard, there's a lot to go through here,
but I want to start not by talking about your
amazing performance, because your your trust performance in this market
has been really fairly spectacular, but talking briefly to set
the scene about the UK small cap market in general,
It's been awful, hasn't it.
Speaker 3 (01:36):
Yeah, it's been really bad.
Speaker 4 (01:38):
I think the AIM market's down thirty seven percent in
the last four years to the end of September, and
Footsy's small not quite as bad, but it's a bit
of a rubbish index now and he has about one
hundred companies in that's still negative over four years. So
it has been really really difficult period. The interesting point, obviously,
(01:58):
and it has been me made some time by UK
smaller companies managers, is actually the longer term record going
back to nineteen fifty five, over pretty much any reasonable
time horizon, or at least someone's normal time horizon, shows
the UK small caps basically and indeed small companies across
the world outperform their larger, larger companies. So this has
(02:20):
kind of been a very strange phase or an elongated
phase of underperformance.
Speaker 2 (02:25):
Yeah, I mean, something goes right back. Do you remember
the old Jim Slater phrase elephants don't gallop right if
you want to make the real money, you need to
be in small caps. But if you told that to
a young investor today that historically small cups of outperformed
larger companies, they look at you like you're the crazy
one because they have no experience of this.
Speaker 4 (02:42):
Yeah, I think that's true. But I think what I
would say to that younger investor, or maybe someone who
hasn't invested much or not done much of their stock
market history is actually the worst points to investor or
often in the peaks of market phases, when the largest
companies become the epitomes of those. So if I think
through my career, I mean I started, I became a
(03:03):
fund manager and an investor in nineteen ninety nine, right
the sort of peak of the TMT bubble, and obviously
both the Internet and mobile phones had become ubiquitous, well
becoming u bictures that point a great development for humanity,
but a huge amount of capital was basically spent, which
everyone thought all the companies that invested it were going
(03:25):
to make a huge fortune from and many of them didn't,
And brands like Nokia don't even exists anymore, but they
were the biggest companies. You will forward through to the
mining cycle and what happens there. Everyone ends up investing
in Glencore and Rio Tinto because China's joining the world economy,
and obviously that overall actually has been good for the
overall amount of economic activity in the world. And again
(03:48):
Anglo Americans buying copper mines at the top in Brazil
and having to write off billions billions later you will
faward through to the financial crisis, and then what happens there
there's huge amounts of financial you know, well, alchemy is
probably the wrong word for it, but let's say innovation,
but innovation as well, and I think that's the point.
(04:09):
I was looking at innovation about how to segment risk
and do different types of lending and make more products
available to other people. And again who which In the
run up to the crisis, the bank shares have been
extremely strong.
Speaker 3 (04:20):
We're on huge multiples of.
Speaker 4 (04:22):
Books, huge sucking capital and a kind of that's kind
of what's happening now clearly in America with huge concentration
into stocks that are investing huge amounts into AI and
are now being valued on very high multiples of future
projective profitability. That is not the case with UK smaller
(04:42):
companies At the moment, there is basically very little profitability
being projective for UK smaller companies. No one likes them.
Their balance sheets are actually very very strong. They cover
a range of industries, many of them touch all kinds
of countries and economies around the world, all types of sectors,
(05:03):
but definitely not an area where these huge amounts of
capital have been sucked into at all.
Speaker 2 (05:09):
What's pushed them so far out of fashion? I mean,
if we look at the large caps in the UK,
you know, the Foots one hundred has had an astounding run,
really and we keep looking at ten thousand and thinking
not long to go now, not long to go No.
In fact, by the time this pot is that we
may have passed ten thousand. So large caps have been
very popular this year, but smaller company is not so much.
What makes smaller companies so particularly unattractive to domestic and
(05:33):
to international investors.
Speaker 4 (05:35):
I think there's two aspects to it. And first you're
absolutely right, FOOTS one hundred up in dollar terms significantly
more than than the SMP this year, and the versus
the median SMP significantly more. I mean, it's the sp
been driven again by those large caps. I think the
main issue is a is liquidity and just the normal
(05:57):
flow of time. So typically if when there's a proper cycle,
getting large does go first, and then and then as
those stocks sort of re rate, money starts to trickle down,
more money kind of comes it comes into that market.
But I do think a concern about liquidity is definitely
the case.
Speaker 3 (06:13):
Now.
Speaker 4 (06:13):
One of the reasons why Rockwood has been doing better
than everyone else basically in the last two three years
is quite a lot of the money, even in UK
small companies, is now concentrated in some very large firms.
And I think you know many of your listeners maybe
maybe they use a wealth manager, and they probably know
that their wealth managers merged with another one and they've
become bigger, and as a result the funds, as these
(06:35):
funds become bigger and the money's more concentrated, they find
it difficult to allocate to smaller markets and indeed smaller
funds generally in fact, which Brockwood is one. So that
liquidity aspect is definitely one of the reasons so far.
But as we've seen from all kinds of stuff, gold
isn't particularly you know, you I can do synthetics. But
(06:56):
and I know you're a bit of a gold bug,
but you know, there are lots of other liquid markets
which in the end catch a bid and start moving.
And when they do, because it's tighter, it tends to
be pretty dramatic. And one of the things that I've
again experienced during my career, when you come out of
more difficult periods, it's pretty fast. When small cap gets moving,
you kind of you sort of got to take some
(07:18):
of the pain in advance before it before it really moves,
because you'll never get it in quick enough. You'll go, oh,
I'll come back tomorrow, or come back tomorrow before you know,
you know, aim or the foozy small's done.
Speaker 3 (07:29):
Alreally had a really strong period.
Speaker 2 (07:31):
Is It also connected to two other things at different
terms of the spectrum, one being the rise of passive investing,
which tends to automatically shovel flows into the larger companies
rather than the smaller and the other being the rise
of private equity, which means that money that might previously
have gone into listed smaller companies or pushed companies towards
(07:52):
IPO stays in the private market. So you've got two
ends there which which make a difference to the liquidity
and hence to the performance of smaller companies.
Speaker 3 (08:00):
I think the second, the private acty piece, is definitely
the case, and we know with pension fund allocations UK
overall itself has massively reduced over the last fifteen twenty years,
and within that as a result of small willers as well.
The passive piece, I'm not quite as sure abo because
(08:20):
it's all sort of in proportions.
Speaker 4 (08:22):
So we were delighted earlier this year Rockford joined the
Footsie All Share Index and Footsie Small Gathers and as
a result we've now got a few passive guys who
bought some Rockford shares and a benefit benefiting from it.
So I'm not so sure passive. I think what the
passive piece does it helps active managers, which dominate UK
(08:43):
small companies. There are no index trackers for the AIM
Index or the Footsie Smallerness.
Speaker 3 (08:49):
I think the passives make active.
Speaker 4 (08:51):
Investment easier, but they may make it slower for the
kind of intrinsic value to come out because the passive
money's done.
Speaker 3 (08:58):
If you see what I.
Speaker 4 (08:59):
Mean, the proportion of the proportion of passive money, it
doesn't it doesn't catalyze a change or unlock value in itself,
very different to how Rockwood, for instance, approaches things.
Speaker 2 (09:10):
Okay, so that sets up the general misery in the market.
And now if we look at your own performance, it's
something completely different. I mean, I'm looking at your fact
sheet from thirtieth September, so a bit out of date,
but this is the end of the of the third
quarter only for comparison purposes. So if you look back
over thirty six months, you're on total shareholder return of
(09:31):
ninety nine point seven percent, net asset value return ninety
three point nine percent, whereas the fits you small not
including other investment trust is thirty one percent, and the
aim all share is minus three percent. So you've outperformed
everyone else hugely. Let's talk about the factors that made
that possible.
Speaker 3 (09:51):
Okay, Well that's very kind of. Yeah. So there's some
different aspects.
Speaker 2 (09:55):
No kind, we are not kind on this podcast. This
is not kind.
Speaker 4 (09:59):
It's just you know, the performance, to put it that way,
because I don't like talking about it myself, So it's
very kind of.
Speaker 3 (10:05):
Yeah.
Speaker 4 (10:06):
So it's basically because we're taking a differentiated approach, and
the aspects that are different are pretty simple. Firstly, we
don't have a benchmark. We as we don't look at
the be any of the possible benchmarks.
Speaker 3 (10:18):
We don't care.
Speaker 4 (10:19):
We don't get paid relative to a benchmark, and benchmarks
do drive quite a lot of professional fund manager behavior.
What we do is we target stocks specifically that we
think can double in value, go up one hundred percent
over three to five years. And actually the returns we've
done the last three would suggest on average they've been
(10:40):
three years, and I was just just going forward for
anyone not to get two over excited. You know, five
years means you double your money if we do fifteen
percent a year, and that's that's kind of what the
target is. The second thing is is that we run
a very concentrated portfolio, so we have the majority of
the capital and the top ten holdings. It's current about
sixty two percent of the portfolio is slightly less of
(11:03):
the quarter end, but we've supported one of our top
ten holdings and are fundraising, so we're up to about
sixty three and we only have twenty five holdings in total.
Most UK smaller companies funds and this is this is
quite critical thing. Actually a maroon they basically have because
again of their sort of risk departments, but linked their
OICH funds. If you remember back to what sort of caused
(11:24):
Woodford to get unstuck, or one of the reasons anyway,
was that he had open ended daily liquidity funds and
Rockwood is a permanent capital investment trust where the capital
stays with us until we lose the contract to run Rockwood.
But I can invest knowing I've got that money.
Speaker 3 (11:40):
Now. The managers that have open ended funds, they have
their risk apartments.
Speaker 4 (11:43):
Sort of tapping them on the shoulders, going, oh, you've
bought this little small cap and do you know with
the amount of money we've got, it's going to take you,
you know, nine months to get out of it if
you change your mind.
Speaker 3 (11:53):
We can't possibly have that because missus.
Speaker 4 (11:55):
Miggins might ask for a money back tomorrow and he
won't be able to give it but give it.
Speaker 3 (11:58):
Back to her.
Speaker 4 (11:59):
And actually, in some instances, those that run out OICH
funds also run investment trusts, but then choose to run
the portfolios almost identically in terms of the names that
they own, so they basically transport the liquidity requirements of
open ended funds onto investment trusts. So with rockwod we
just don't do that. That means that from a concentration perspective,
we know real get real bang from our buck.
Speaker 3 (12:20):
It works both ways. We've got to get it right.
Speaker 4 (12:22):
But when we get it right, you know, it really
impacts that it impacts the fund.
Speaker 2 (12:26):
Okay, and can I just stop be there to say,
just stop be there to say that also means that
you have a much wider universe to choose from in
that under their dynamics, between the oiks and the trust
that you've just been talking about other fund managers, that
means that there's a range of the much smaller and
less liquid stocks that they wouldn't invest in at all.
Speaker 3 (12:42):
Correct, That is true, Yeah, that is exactly that is true. Yeah,
that's right.
Speaker 4 (12:47):
We actually limit Interestingly, we slightly then choose to limit
our universe because we've found some of the large, even
UK smaller companies funds typically don't like investing below two
hundred and fifty million, So for Rockwood, we own invest
when the company is below two hundred and fifty million
market cap. I mean, and some listeners might be quite
surprised to hear that. In lots of UK smaller companies
(13:09):
funds that their portfolio is invested in multi billion pound companies,
which aren't sound very small to my mother anyway. So
we're going right to the small and again we do
that because they're the most inefficient, you know, so part
parts the market is you have the less professional investors,
the least amount of research, and your information advantage you
can get from extra work, it can become a lot quicker.
(13:30):
And that's one of the flip sides people don't remember
about concentration is that when you've only got twenty five
holdings and you're looking to replace maybe three or four
holdings a year maximum, you are you've got a lot
more time to do the DD on that one stop
you than you would if you're monitoring seventy or eighty
holdings that are that are larger fund might have. And
(13:50):
I think think that's been helpful for the amount of
due diligence we can do on our holdings.
Speaker 3 (13:54):
To try and improve of our overall hit rate.
Speaker 4 (13:57):
Now, there are two other aspects which I think and
one of them has been useful in the last few
years but might not have been quite as useful during
the previous fifteen well since the financial crisis, is that
we're also unashamably value investors and value investing went through
a long period of not really working in the UK
(14:18):
due to the sort of extremely low interest rates which
undermines value investing. And since interest rates have moved back
to there, let's face it, you know, fifty to one
hundred year norms, a number of fund managers have found.
Speaker 2 (14:33):
One thousand year norms.
Speaker 4 (14:34):
Really, I think, yeah, yeah, there's that great, great the
Price of Time book by Chances what I recommend people,
really brilliant.
Speaker 2 (14:41):
But we've had him on the pod Rich, We've had
him on the pod Yeah, and.
Speaker 4 (14:45):
Go listen to that episode straight after he's probably told
you you know, so we're back to much more normal
and probably sensible rough level of interest rates. Maybe they
should be dropping a bit in the UK, and I
think that's probably probably likely, But that that backdop's really
important for stars stars of investment, and we've had a
much more normal playing field for value investing and that's
(15:06):
helped the portfolio. And as you might imagine an index
I aim and small cap generally it is probably it's
over endowed with growth type investment opportunities versus sort of
value investment opportunities. And we are focused on you know,
quite a lot of our holies of recovery situations.
Speaker 3 (15:26):
When we first we first get get involved.
Speaker 2 (15:28):
Okay, we go, can we interrupt you again? I have
to interrupt you again to ask you to to ask
you to define value for us. In that we hear
a lot from people about I'm a value investor, I'm
a growth investor, I'm a quality growth investor, et cetera,
et cetera, And of course they all overlap and in
many ways everyone really means the same thing. Because anyone
who's buying calls themselves a growth investor, they still think
(15:49):
they're getting value right, or they wouldn't be doing it.
So how are you described, how are you defining value?
And you say you're a value investor, Well.
Speaker 4 (15:58):
We think that DCFS is very dangerous, but that they
but that the concept of DCFI businesses work, its future
free cash plays discounted back to today is the right
way of thinking about value.
Speaker 3 (16:13):
But we also think.
Speaker 4 (16:14):
It's very very difficult for investors to have any idea
whatsoever's going on a few years. Hence, so basically we
focused on the free cashbow generating ability of a business
in the next few years. Often when it's not generating
free cash and valued as if it doesn't generate any
or it won't even exist, and then we kind of
(16:34):
discount back the nearer term free cash flows, and in
that regard we also look at like real asset value
linked to that. So half the portfolio in Rockwood is
training on a discount to book value, which which you know,
which Warren Buffett gave up on about thirty years ago
because it weren't enough stocks training at a discount book
value for him to buy. But you can buy another
(16:57):
quite a few stocks these days on discounts to book value.
Speaker 2 (17:02):
Okay, that gus a good sense of that, and apologies
for interrupting. You can now go back to telling us
what you were about to tell us about the different
reasons why you think you've succeeded.
Speaker 4 (17:12):
So the final piece I think is really really critical
to why the performance has been is they were also active,
so we called it constructive engagement. We're not sort of
haranguing people most of the time, but we are. We
do take stakes. We actually lean into the permanent capital
and we build up stakes and then we work we
(17:33):
work out what needs to change or evolve for for
for value, to be unlocked or created or recovered, and
essentially we then will we'll reach out to other stakeholders
in the first instances that you know management and the board,
but regularly to other shareholders and who are typically in
(17:55):
the sorts of things we invest in sort of pretty
upset generally and sort of up for it, and to say, look,
we think, you know, these sort of changes might be
a good idea. What you think and they sort of say, well,
we agree with abn C, we're not quite sure about D.
And then we might evolve what we're thinking, and then
we'll sort of do the quite heavy lifting and sort
of agitate to try and catalyze stuff to happen.
Speaker 3 (18:18):
And that that I.
Speaker 4 (18:19):
Think, you know a number of instances has helped generate
returns for the fund rather sort of sitting there and
hoping that one day to the UK small cat goes up.
Speaker 2 (18:29):
Basically, so, when the managing director of a listed smaller
company in the UK sees you on their share register,
do they think this is great, I'm going to get
some good advice about how to improve things here, or
do they have some sleepless nights.
Speaker 4 (18:44):
I think it probably depends on the situation. I know,
if you rang up a number of our CEOs. For instance,
if you rang up Adolfo Hernandez, who's the new CEO
of Capita form a foty one hundred company, but now
any list valued at about three hundred and fifty million,
we bought it when it got down to two hundred
and twenty million. Or Ian Percival at try Fast which
(19:06):
is the nuts and Bolts Fast and that's been listed
for twenty years. Or Ian McNaught at Vanquist Banking, who
was who's the new CEO what formerly was formerly called
Provident Financial. They would all say it's been a really
positive and constructive experience with.
Speaker 3 (19:27):
Us.
Speaker 4 (19:27):
I know they do tend to start to think because
what happens is it's just it's normal. It's repeatab all this.
It's how it's the life cycle that companies go through.
So they you know, everything's going swimmingly, let's say the
returns are fine, but then you get this period of complacency,
or they do a rubbish acquisition that they shouldn't really
have done. Often with debt, you know, golden sacks have
(19:49):
come in and told them.
Speaker 3 (19:50):
To do something for lots of fees. It's all gone wrong.
Speaker 4 (19:53):
The returns and profitability collapses, and then you get this
sort of de rating of the shares. Everyone's very upset.
The narrative's negative it completely. People are kind of know
this needs to be changed, but often people just have
put it off. They don't do it. The CEO might
know it's actually not him, it's the finance director that's
let him down, or it may be this obvious he
knows he's for the chop anyway, and really it's an
(20:13):
easy conversation and we're just catalyzing what's going to happen,
and sometimes change like that happens. But if you take
a good example Lisa Jacobs, who's a fantastic CEO at
Funding Circle, which was listed actually a good example listed
as an IPO by Goldman Sachs a number of years
ago one and a half billion pound market cap.
Speaker 3 (20:34):
We were able to.
Speaker 4 (20:35):
Buy that a discount to net cash about a year
a year and a half ago, and we started building
our position and we started engaging with them about why
they weren't using the excess cash they clearly had to
buy back stocks, why the board still had so many
people on it even though the market cap become right
back down again, why they hadn't done any more significant
(20:58):
cost cutting than just sort of tinking around around the edges.
And actually it was all very constructive, and before we
had to get sort of upset or anything like that,
they basically started doing all these things and are very
you know, it's been great.
Speaker 3 (21:09):
For all shareholders. Essentially.
Speaker 4 (21:11):
The other thing that's important is we do do we
We really try our best to do it without sort
of giving lots of sort of in the public domain stuff,
So we keep our arguments quiet for as absolutely long
as possible.
Speaker 2 (21:39):
Let's talk about the current portfolio. You're clearly fundamental, bottom
up value driven, but do you see any themes emerging
in it? And I look, you've got a few defense companies,
for example, in the top ten.
Speaker 4 (21:51):
Now I think you might answer that question. The thing
is because it's it's fair enough. Because you know, I
always I have this phrase this. I made this one up.
Actually I don't myself with many things, but I call
it themes for dreams. And this is because themes it
is because humans love a good story and it kind
of simplifies much more complicated matters for them. And so
(22:13):
you can almost never really let go of something if
it's in a theme, so I think it's quite dangerous,
so we think about stuff in kind of life cycles.
Speaker 3 (22:21):
Now it is true, just to be clear.
Speaker 4 (22:23):
That we've ended up with bits and bobs of defense exposure,
but probably not enough to say, oh, we've got a
big bet on defense. And that's because, for instance, one
of our massive winners we've had as a company called Filtronic,
and Filtronic are doing components into SpaceX's Starlink satellite platform.
(22:43):
And in fact we still think it's the only share
that Elon Musk's bought in the UK, which is pretty exciting.
We actually bought it at twelve p and we bought
five percent of the company and Elon brought in at
thirty five P, so we were quite quite happy about that.
Speaker 3 (22:57):
If I ever get to meet him, we'll have to
sort of be smug okay.
Speaker 2 (23:00):
So that one bet will have been. There has been
a big factor in your app performance.
Speaker 4 (23:04):
That has been a huge that's been a significant factor.
Filterronics been a massive factor of funding Circle Gallaford, Try
Restore now Capita a number of Filterronics being good, but
we've had a number of multi bag and over the years.
If the nature of this kind of a portfolio that
returns are driven by six or seven stocks over any
(23:26):
kind of three for five year period period.
Speaker 2 (23:28):
What have you got in the portfolio at the moment
that you're most excited about. What's your next ten bagger?
Speaker 1 (23:34):
Oh?
Speaker 4 (23:35):
Ten bag is impossible to see the all right, fine, okay.
Speaker 3 (23:39):
Okay, okay, okay.
Speaker 4 (23:41):
So remember like the target return is one hundred percent
over three to five years. Okay, So in that regard,
there's quite a few in the in the portfolio that
we think can do that. One that we've already made
a decent return that's got a lot more coming for
it is actually the largest holding this company called RM SO.
RM is an education business has three divisions and it
(24:01):
actually sort of one of its visions supply schools with
triculum based aids and teaching aids. And the second division
does technology for schools outsourced for groups of schools and
runs the broad band and the tech tech for the schools.
Pretty low margin that business, but public sector facing a
decent contracts. And then the third business is the really
exciting business, which is a it does assessment for schools.
(24:23):
They have the contracts to mark the exams for International
Baccalaureate Icaw County Exams, China tax exams, Cambridge Assessment.
Speaker 3 (24:32):
They do. They do all these exams.
Speaker 4 (24:34):
And those IB have given them a massive contract as
well as Cambride Assessment to digitalize that process over the
next few years into a platform which is going to
become a very valuable platform that will become very sticky
and highly profitable.
Speaker 3 (24:49):
We've built up a really big state, like sixteen percent
of the company. We've proposed a director who went onto
the board. Oh, just to remind you, so in terms
of our active stuff, we've got ten board positions people
either proposed or actually we've you know, we've actually got
a board seat that's a rock with border. Mostly we
propose people who then we're comfortable with. But we've got
ten board seats of the twenty five holdings in our
(25:12):
iron got aboard seat. And basically they've announced recently, which
is what we've been asking them for some time to do,
is they're going to sell off those the first two
divisions I mentioned, which will pay down their excess debt
that they've got, should move the business into a net
cash position, and then allow the butterfly of this assessment
business to sort of emerge. We think the.
Speaker 4 (25:32):
Assessment business is worth at least one hundred and fifty million,
probably more in time as it matures and more clients
come onto it, and that will be quite an exciting.
Now that's the kind of stuff that business is valued,
that one hundred and ten million. Most mainstream fund managers
won't look at it, you know, and we know when
they do. Some of them way like the Factor's got
(25:52):
amounts of a decent amount of debt since we've since
we've invested in it. We've got a new CEO, new CFO,
new head of transformation, new head of HR, new heads
of all three divisions, and they've announced officially now that
those other divisions are.
Speaker 3 (26:07):
A non core, so we think, and they're cracking on
with it.
Speaker 4 (26:10):
So we think we'll see those catalysts during twenty twenty
six that sch nonlock the value in that share in
an era period. I also think if I mentioned earlier,
but I do think it's quite an exciting story in
one many many of the listens they probably if they
haven't heard of the stock Capita they I'm afraid sadly
they may have to use their services in one way
(26:30):
or another. The reason I say that Capita manages lots
of public sector contracts for the government, like all the
ones we hate so like the congestion charge and the
TV license, and it does sort of it does a
big contract for primary care GP back office. What else
is the student loan company? All these sorts of things,
(26:51):
and it was a huge stock for t to one hundred,
went completely wrong, ended up with far too much debt,
real mess, accounting problems, you name it, cyber attacks.
Speaker 3 (27:01):
Basically you can come up with anything else that could
have gone wrong.
Speaker 4 (27:05):
But after quite a period of restructuring and sort of
sorting all that mess out, they in particular a long
disposal program which paid down all the debt, paid down
all the pension fundation deficit issues. It's now emerging, and
believe it or not, it's becoming almost sort of tentatively
not sure I should use this this acronym, but it's it's.
Speaker 3 (27:26):
Basically becoming AI AI. So you'll understand why why I'm tenalid.
Speaker 4 (27:32):
Essentially, they do a lot of business process outsourcing capital
both of the private sector and the public sector. And
this is rather than working out exactly this is totally
an area where AI is going to have a massive
help for how their clients benefit from AI, but also
how you deliver on those contracts in a more profitable way.
So Capita we think is going to start generating cash
(27:54):
and the net for the first time in years, and
then like it probably should be this quarter roughly now
as you move into next year, they should be able
to do some further There's a little bit of final
portfolio structuring. They've got a loss making business they need
to exit. It's actually just one contract that needs to go,
but it's heavily loss making. And then the public sector
division we think will come into full view to mainstream
(28:18):
investors now that business, actually the public sector, which has
most of those contracts I mentioned, it has one point
three billion of sales and makes an eight percent margin,
which it converts about seventy five percent into cash. We
think that divisional loans worth at least nine hundred million
quid and actually the debts down at a capita it's
(28:40):
on a p of about seven or something like that,
you know, So that that's another one we think could
probably double triple from here if the new team that
sort of solved it.
Speaker 2 (28:51):
Okay, interesting, thank you. Can I ask you about M
and A, which has been again one of the One
of the drivers in this market has been the mergers
and acquisitions. Companies leaving the market to go private and
companies merging. So we've seen a kind of general shrinkage
of the number of listed companies, particularly at the lower
end right, and we haven't seen that pipeline being we've
(29:12):
filled with new IPOs. Now we here constantly every quarter
we are told that the next quarter is going to
be the quarter of IPOs. It's all coming back. I
wonder how you see that three ways.
Speaker 4 (29:26):
Firstly, actually this quarter has actually started to pick up genuinely.
So last year was the worst year since nineteen ninety
four or something that there were three IPOs. The first
half of this year was actually terrible. I think there's one.
We've just had two or three, and just seems to
be a view that the market is just gradually opening.
(29:49):
I'm our strategy won't invest in IPAs. We never never
have lots, but most people do so that that's fine,
and there are lots of ways of having winning portfolio.
We just don't like IPOs because basically they choose the
time they choose to do it is when they think
is the best time to do it, and they're never
going to choose it when the valuation is the lowest
point in the cycle and they don't have any history
(30:12):
of earnings.
Speaker 3 (30:13):
And that's again a bit dangerous, you know, but you
know they're exciting.
Speaker 4 (30:17):
It's an easy way for the big funds to deploy
get cash into the market because they hate buying things
in the market because everyone finds out they're doing it
and then pushes the prices up on them, so they
prefer to deploy straight into an IPO. So I think
that is starting to come back. I think there has
been a huge amount of work. It's all quite boring
(30:38):
stuff which the general public shouldn't really you know, bore
themselves with, But there have been quite a lot of
changes and reforms to the listing regime and no other
bits and bobs that everyone's been working on during this
sort of problematic market the last couple of years. I
think are probably just starting to pull together in the
ingredients which sort of get people to move. I did
(30:58):
see a very interesting piece of research the other day
that shared of the I think of the I've actually
I wrote it down. I couldn't believe I've written it down. Yeah,
I think, yeah, of this of the fourteen companies that
actually listed in the last couple of years in America
that were basically it should have been there were sort
of British.
Speaker 3 (31:17):
That went to America.
Speaker 4 (31:18):
Instead of those, only three of three have gone up,
which was arm seven have gone down, and ten have
gone bust.
Speaker 2 (31:25):
Because they all listed at too higher price.
Speaker 3 (31:29):
And just gone for it.
Speaker 4 (31:31):
We have been a bit through this before in the
in UK small CapMan general in the UK market after
the TMT bust, when I first started investing, there was
a sort of fallow period where no one's had the
you know, the gumption to get going and then and
then then it picks up relatively quickly.
Speaker 3 (31:44):
That the backlog must be big, particularly from private exity.
Speaker 4 (31:48):
You mentioned earlier that those guys really do need to
job on a number of their investments in order to
close out their funds.
Speaker 3 (31:55):
But I was going to just I would mention this
is that like the overall.
Speaker 4 (31:59):
Situation on the UK and the sort of the situation,
it is a bit like the ingredients of the cake
are all there now. So the House of Commons pension
scheme has one and a half percent in UK equities
right UK two is in generated down to like four
percent or three or four percent rather than forty.
Speaker 3 (32:18):
The sellers are sort of gone yeah or pretty much gone.
Speaker 4 (32:20):
Yeah. The performance has been terrible, it hasn't which is
a good starting. That's a good ingredient, and performance having
been terrible rather than being great. The valuations are attractive.
Speaker 3 (32:29):
Yeah.
Speaker 4 (32:30):
The leverage is now low, definitely in corporate, corporate and
also actually UK consumers. You know, balance sheets are in
good position and expectations are relatively low. Private equity and
trade buyers are as you just said that kind of
highlighting that there's there's value here.
Speaker 3 (32:47):
Interest rates probably are gradually falling.
Speaker 4 (32:49):
Obviously inflation has been a bit sticky, but you know,
we can all speculate that I suspect this this this
budget might help inflation fall rather than accelerate inflation, be
my guess that That said, with public sector wages running
at five point seven percent this year, I mean, that's
not really helpful to get your interest rates down. Government
needs to really think carefully, carefully about that. So every
(33:11):
poem's come there, All the ingredients are there, and all
we now need is for Rachel Reeves to sort of
turn the oven on basically with a bit of government
help and then and then we're off.
Speaker 2 (33:21):
And how do you expect her to do that by
changes to the ice of rolls or shifts and the
percentage that pension funds have to keep in UK gould
teach those she's.
Speaker 3 (33:28):
Really cold and she wants to be remembered because she
may think that whatever I do.
Speaker 2 (33:33):
Oh, I think she's going to be remembered. I think
she's going to be remembered.
Speaker 3 (33:36):
But if she wants to remember any if she's got
anything to say.
Speaker 4 (33:38):
She did positively afterwards, and if she thinks that like
basically this is the last role for her, maybe could
be her last budget, even if it's the right budget.
If you see what I mean, yeah, then a good
thing's been remembered. Decent UK equities of positive measures. Obviously
the ier measure is basically neutral, so it's a tax
neutral measures and that the Treasury can't come plain about it.
(34:00):
You just say, look, if you want any future tax
breaks for ices, it's going to be invested in the
UK and UK focused investment trust and UK stock market.
Speaker 3 (34:12):
On the pensions, I think it's harder, but I think it's.
Speaker 4 (34:15):
Still if you really wanted to go for it, you
know that they've leaked this sort of potential po as
you of saying on DC defaults that in the first instance,
DC defaults have to have twenty five percent and then
you can opt out.
Speaker 2 (34:27):
You know.
Speaker 4 (34:27):
The reason why they do that is apparently the stats
are like ninety nine percent of people fill in their
pension fund forms in less than twenty seconds and just
do tikt tick ticks. So you'd probably end up with
quite a lot of ending up going in. But the
key here, moment I think the point is is it's
about if we think about where the US market is
now right and how it's got to where it is
(34:48):
over the last period, and why the UK is where
it is now, and the thinking of people that are
investing now, they're not they're investing in the US are
because it's been performing well. They don't really care about
the valuation they brought into the story. But it's really
the momentum that's key. Yeah, all we need to do
(35:09):
is start that momentum. And actually, as you mentioned, every
foot to one hundred has already started a bit. Just
start a bit of momentum and the rest will just
saw itself out. I actually literally believe that people or
it just it just the momentum just will build on
itself and we'll start to get this rerating and that
will bring more companies to market. And you know, the
private ecty guys could could relist loads of companies over
(35:32):
the next few years if the market conditions were conducive
to that.
Speaker 2 (35:36):
Well, it is true, isn't it. All study show that
the greatest investment method of all time is value plust momentum.
Speaker 4 (35:42):
Yeah, yeah, And it's something It's something I you know,
I have to say, I'm always learning and you know
the whole time in this, in this you know, the
moment you think you know or you get kicked in
the nuts basically, and the reality is that I wish
I'd learned it earlier. But if you if your kind
of DNA is value, which might which mine is? You know,
value investors typically always sell their stocks too early and
(36:04):
don't because they think momentums like sort of a dirty
habit that, you know, sort of something you shouldn't really,
you know, you don't want to. You want to have
a purest return, and you know, you buy it super cheap,
you know, and when everyone else is sort of behaviorally
can't stand it, and then you sell it to them.
But you kind of running your winners is something I
(36:24):
learned about halfway through my career, and that's definitely helped
me get a bit better. One of the cool things
about Rockwood actually is that we can really do that.
So I think what didn't help me with making that
learning was that in OIKE funds, which I mainly ran,
and pension funds around and punch of funds before, is
that you you sort of run your winner.
Speaker 3 (36:41):
But because the kind of liquidity and kind.
Speaker 4 (36:42):
Of portfolio construction rules around those sorts of funds, you
just you're always sort of chipping away at the top
of the position, just trimming away at it, and you
never really can pound up the whole the whole thing.
So in Rockwood, we're quite happy to run run our
winners up, which we've mainly done brilliant.
Speaker 2 (37:00):
Well, thank you very much. I think we've covered a
lot of ground there in half an hour. Well, don't
ask Can I ask you one last question? What are
you reading?
Speaker 4 (37:08):
Oh my god, Oh my god, it's really sad people
that know me. I'm actually got three on the go.
I'm reading some I'm read I kind of even because
I've got the sets I'm reading some PG Woodhouse again
at the moment.
Speaker 2 (37:24):
I think it's something like very calming, beans.
Speaker 4 (37:27):
Crumpets and whatever. It's kind of quite fun. It's such
such great writing I'm reading. I've just started Sorkin's new
book that's just out in nineteen twenty nine, and I
had the I had the pleasure in honor of going
to a talk by Charles Moore recently, who's written who
(37:49):
read the biography of Margaret Margaret Thatcher, and I was
rereading that because you know, it doesn't matter what your
political things are, we definitely need kind.
Speaker 3 (37:58):
Of like difficult leadership that she was prepared to do
in this country.
Speaker 4 (38:05):
You know, in my in my opinion that now you
people that kind of don't mind being unpopular basically for
their for what they really believe in and have beliefs.
Speaker 2 (38:15):
Brilliant recommendation. Thank you very much. Thank you, thanks for
listening to this week's Marion Talks Money. If you like
our show, rate review, and subscribe wherever you listen to podcasts,
and keep sending questions or comments to Merorn Money at
Bloomberg dot net. You can also follow me and John
on Twitter. All exam at Marinus w and John is
(38:36):
John Underscore Steppe. This episode was hosted by me Maren
Zumbset Web. It was produced by Summersaudi and Moses and
sound designed by Black Maples and Kelly Garry. Special thanks
to Richard's dably
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:17):
Welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Merrit Sunset
Web and in this episode we are going to focus
on UK smaller companies. Now, any regular listener to this
show will know that John and I often talk about
why you should be invested in smaller companies. They have
a long term record of outperforming. At the moment, particularly
(00:39):
in the UK, they are extremely inexpensive. There's a lot
of potential there for mean reversion and quite a lot
of growth that we are simply not showing enough interesting
small caps. Despite all these things, are still described in
the UK as one of the most unloved sectors in
the world. Why is that? What's going on? When might
(01:00):
it change? We have got the perfect guest with us
to discuss that. It is Richard's Stavely, manager of the
Rockward Strategic Investment Trust, which focuses entirely on very small
companies in the UK.
Speaker 3 (01:13):
Richard.
Speaker 2 (01:13):
Welcome to Maren Doalks Money.
Speaker 3 (01:15):
Thank you very much, Marin, great tos be speaking to you.
Speaker 2 (01:18):
Okay, now, Richard, there's a lot to go through here,
but I want to start not by talking about your
amazing performance, because your your trust performance in this market
has been really fairly spectacular, but talking briefly to set
the scene about the UK small cap market in general,
It's been awful, hasn't it.
Speaker 3 (01:36):
Yeah, it's been really bad.
Speaker 4 (01:38):
I think the AIM market's down thirty seven percent in
the last four years to the end of September, and
Footsy's small not quite as bad, but it's a bit
of a rubbish index now and he has about one
hundred companies in that's still negative over four years. So
it has been really really difficult period. The interesting point, obviously,
(01:58):
and it has been me made some time by UK
smaller companies managers, is actually the longer term record going
back to nineteen fifty five, over pretty much any reasonable
time horizon, or at least someone's normal time horizon, shows
the UK small caps basically and indeed small companies across
the world outperform their larger, larger companies. So this has
(02:20):
kind of been a very strange phase or an elongated
phase of underperformance.
Speaker 2 (02:25):
Yeah, I mean, something goes right back. Do you remember
the old Jim Slater phrase elephants don't gallop right if
you want to make the real money, you need to
be in small caps. But if you told that to
a young investor today that historically small cups of outperformed
larger companies, they look at you like you're the crazy
one because they have no experience of this.
Speaker 4 (02:42):
Yeah, I think that's true. But I think what I
would say to that younger investor, or maybe someone who
hasn't invested much or not done much of their stock
market history is actually the worst points to investor or
often in the peaks of market phases, when the largest
companies become the epitomes of those. So if I think
through my career, I mean I started, I became a
(03:03):
fund manager and an investor in nineteen ninety nine, right
the sort of peak of the TMT bubble, and obviously
both the Internet and mobile phones had become ubiquitous, well
becoming u bictures that point a great development for humanity,
but a huge amount of capital was basically spent, which
everyone thought all the companies that invested it were going
(03:25):
to make a huge fortune from and many of them didn't,
And brands like Nokia don't even exists anymore, but they
were the biggest companies. You will forward through to the
mining cycle and what happens there. Everyone ends up investing
in Glencore and Rio Tinto because China's joining the world economy,
and obviously that overall actually has been good for the
overall amount of economic activity in the world. And again
(03:48):
Anglo Americans buying copper mines at the top in Brazil
and having to write off billions billions later you will
faward through to the financial crisis, and then what happens there
there's huge amounts of financial you know, well, alchemy is
probably the wrong word for it, but let's say innovation,
but innovation as well, and I think that's the point.
(04:09):
I was looking at innovation about how to segment risk
and do different types of lending and make more products
available to other people. And again who which In the
run up to the crisis, the bank shares have been
extremely strong.
Speaker 3 (04:20):
We're on huge multiples of.
Speaker 4 (04:22):
Books, huge sucking capital and a kind of that's kind
of what's happening now clearly in America with huge concentration
into stocks that are investing huge amounts into AI and
are now being valued on very high multiples of future
projective profitability. That is not the case with UK smaller
(04:42):
companies At the moment, there is basically very little profitability
being projective for UK smaller companies. No one likes them.
Their balance sheets are actually very very strong. They cover
a range of industries, many of them touch all kinds
of countries and economies around the world, all types of sectors,
(05:03):
but definitely not an area where these huge amounts of
capital have been sucked into at all.
Speaker 2 (05:09):
What's pushed them so far out of fashion? I mean,
if we look at the large caps in the UK,
you know, the Foots one hundred has had an astounding run,
really and we keep looking at ten thousand and thinking
not long to go now, not long to go No.
In fact, by the time this pot is that we
may have passed ten thousand. So large caps have been
very popular this year, but smaller company is not so much.
What makes smaller companies so particularly unattractive to domestic and
(05:33):
to international investors.
Speaker 4 (05:35):
I think there's two aspects to it. And first you're
absolutely right, FOOTS one hundred up in dollar terms significantly
more than than the SMP this year, and the versus
the median SMP significantly more. I mean, it's the sp
been driven again by those large caps. I think the
main issue is a is liquidity and just the normal
(05:57):
flow of time. So typically if when there's a proper cycle,
getting large does go first, and then and then as
those stocks sort of re rate, money starts to trickle down,
more money kind of comes it comes into that market.
But I do think a concern about liquidity is definitely
the case.
Speaker 3 (06:13):
Now.
Speaker 4 (06:13):
One of the reasons why Rockwood has been doing better
than everyone else basically in the last two three years
is quite a lot of the money, even in UK
small companies, is now concentrated in some very large firms.
And I think you know many of your listeners maybe
maybe they use a wealth manager, and they probably know
that their wealth managers merged with another one and they've
become bigger, and as a result the funds, as these
(06:35):
funds become bigger and the money's more concentrated, they find
it difficult to allocate to smaller markets and indeed smaller
funds generally in fact, which Brockwood is one. So that
liquidity aspect is definitely one of the reasons so far.
But as we've seen from all kinds of stuff, gold
isn't particularly you know, you I can do synthetics. But
(06:56):
and I know you're a bit of a gold bug,
but you know, there are lots of other liquid markets
which in the end catch a bid and start moving.
And when they do, because it's tighter, it tends to
be pretty dramatic. And one of the things that I've
again experienced during my career, when you come out of
more difficult periods, it's pretty fast. When small cap gets moving,
you kind of you sort of got to take some
(07:18):
of the pain in advance before it before it really moves,
because you'll never get it in quick enough. You'll go, oh,
I'll come back tomorrow, or come back tomorrow before you know,
you know, aim or the foozy small's done.
Speaker 3 (07:29):
Alreally had a really strong period.
Speaker 2 (07:31):
Is It also connected to two other things at different
terms of the spectrum, one being the rise of passive investing,
which tends to automatically shovel flows into the larger companies
rather than the smaller and the other being the rise
of private equity, which means that money that might previously
have gone into listed smaller companies or pushed companies towards
(07:52):
IPO stays in the private market. So you've got two
ends there which which make a difference to the liquidity
and hence to the performance of smaller companies.
Speaker 3 (08:00):
I think the second, the private acty piece, is definitely
the case, and we know with pension fund allocations UK
overall itself has massively reduced over the last fifteen twenty years,
and within that as a result of small willers as well.
The passive piece, I'm not quite as sure abo because
(08:20):
it's all sort of in proportions.
Speaker 4 (08:22):
So we were delighted earlier this year Rockford joined the
Footsie All Share Index and Footsie Small Gathers and as
a result we've now got a few passive guys who
bought some Rockford shares and a benefit benefiting from it.
So I'm not so sure passive. I think what the
passive piece does it helps active managers, which dominate UK
(08:43):
small companies. There are no index trackers for the AIM
Index or the Footsie Smallerness.
Speaker 3 (08:49):
I think the passives make active.
Speaker 4 (08:51):
Investment easier, but they may make it slower for the
kind of intrinsic value to come out because the passive
money's done.
Speaker 3 (08:58):
If you see what I.
Speaker 4 (08:59):
Mean, the proportion of the proportion of passive money, it
doesn't it doesn't catalyze a change or unlock value in itself,
very different to how Rockwood, for instance, approaches things.
Speaker 2 (09:10):
Okay, so that sets up the general misery in the market.
And now if we look at your own performance, it's
something completely different. I mean, I'm looking at your fact
sheet from thirtieth September, so a bit out of date,
but this is the end of the of the third
quarter only for comparison purposes. So if you look back
over thirty six months, you're on total shareholder return of
(09:31):
ninety nine point seven percent, net asset value return ninety
three point nine percent, whereas the fits you small not
including other investment trust is thirty one percent, and the
aim all share is minus three percent. So you've outperformed
everyone else hugely. Let's talk about the factors that made
that possible.
Speaker 3 (09:51):
Okay, Well that's very kind of. Yeah. So there's some
different aspects.
Speaker 2 (09:55):
No kind, we are not kind on this podcast. This
is not kind.
Speaker 4 (09:59):
It's just you know, the performance, to put it that way,
because I don't like talking about it myself, So it's
very kind of.
Speaker 3 (10:05):
Yeah.
Speaker 4 (10:06):
So it's basically because we're taking a differentiated approach, and
the aspects that are different are pretty simple. Firstly, we
don't have a benchmark. We as we don't look at
the be any of the possible benchmarks.
Speaker 3 (10:18):
We don't care.
Speaker 4 (10:19):
We don't get paid relative to a benchmark, and benchmarks
do drive quite a lot of professional fund manager behavior.
What we do is we target stocks specifically that we
think can double in value, go up one hundred percent
over three to five years. And actually the returns we've
done the last three would suggest on average they've been
(10:40):
three years, and I was just just going forward for
anyone not to get two over excited. You know, five
years means you double your money if we do fifteen
percent a year, and that's that's kind of what the
target is. The second thing is is that we run
a very concentrated portfolio, so we have the majority of
the capital and the top ten holdings. It's current about
sixty two percent of the portfolio is slightly less of
(11:03):
the quarter end, but we've supported one of our top
ten holdings and are fundraising, so we're up to about
sixty three and we only have twenty five holdings in total.
Most UK smaller companies funds and this is this is
quite critical thing. Actually a maroon they basically have because
again of their sort of risk departments, but linked their
OICH funds. If you remember back to what sort of caused
(11:24):
Woodford to get unstuck, or one of the reasons anyway,
was that he had open ended daily liquidity funds and
Rockwood is a permanent capital investment trust where the capital
stays with us until we lose the contract to run Rockwood.
But I can invest knowing I've got that money.
Speaker 3 (11:40):
Now. The managers that have open ended funds, they have
their risk apartments.
Speaker 4 (11:43):
Sort of tapping them on the shoulders, going, oh, you've
bought this little small cap and do you know with
the amount of money we've got, it's going to take you,
you know, nine months to get out of it if
you change your mind.
Speaker 3 (11:53):
We can't possibly have that because missus.
Speaker 4 (11:55):
Miggins might ask for a money back tomorrow and he
won't be able to give it but give it.
Speaker 3 (11:58):
Back to her.
Speaker 4 (11:59):
And actually, in some instances, those that run out OICH
funds also run investment trusts, but then choose to run
the portfolios almost identically in terms of the names that
they own, so they basically transport the liquidity requirements of
open ended funds onto investment trusts. So with rockwod we
just don't do that. That means that from a concentration perspective,
we know real get real bang from our buck.
Speaker 3 (12:20):
It works both ways. We've got to get it right.
Speaker 4 (12:22):
But when we get it right, you know, it really
impacts that it impacts the fund.
Speaker 2 (12:26):
Okay, and can I just stop be there to say,
just stop be there to say that also means that
you have a much wider universe to choose from in
that under their dynamics, between the oiks and the trust
that you've just been talking about other fund managers, that
means that there's a range of the much smaller and
less liquid stocks that they wouldn't invest in at all.
Speaker 3 (12:42):
Correct, That is true, Yeah, that is exactly that is true. Yeah,
that's right.
Speaker 4 (12:47):
We actually limit Interestingly, we slightly then choose to limit
our universe because we've found some of the large, even
UK smaller companies funds typically don't like investing below two
hundred and fifty million, So for Rockwood, we own invest
when the company is below two hundred and fifty million
market cap. I mean, and some listeners might be quite
surprised to hear that. In lots of UK smaller companies
(13:09):
funds that their portfolio is invested in multi billion pound companies,
which aren't sound very small to my mother anyway. So
we're going right to the small and again we do
that because they're the most inefficient, you know, so part
parts the market is you have the less professional investors,
the least amount of research, and your information advantage you
can get from extra work, it can become a lot quicker.
(13:30):
And that's one of the flip sides people don't remember
about concentration is that when you've only got twenty five
holdings and you're looking to replace maybe three or four
holdings a year maximum, you are you've got a lot
more time to do the DD on that one stop
you than you would if you're monitoring seventy or eighty
holdings that are that are larger fund might have. And
(13:50):
I think think that's been helpful for the amount of
due diligence we can do on our holdings.
Speaker 3 (13:54):
To try and improve of our overall hit rate.
Speaker 4 (13:57):
Now, there are two other aspects which I think and
one of them has been useful in the last few
years but might not have been quite as useful during
the previous fifteen well since the financial crisis, is that
we're also unashamably value investors and value investing went through
a long period of not really working in the UK
(14:18):
due to the sort of extremely low interest rates which
undermines value investing. And since interest rates have moved back
to there, let's face it, you know, fifty to one
hundred year norms, a number of fund managers have found.
Speaker 2 (14:33):
One thousand year norms.
Speaker 4 (14:34):
Really, I think, yeah, yeah, there's that great, great the
Price of Time book by Chances what I recommend people,
really brilliant.
Speaker 2 (14:41):
But we've had him on the pod Rich, We've had
him on the pod Yeah, and.
Speaker 4 (14:45):
Go listen to that episode straight after he's probably told
you you know, so we're back to much more normal
and probably sensible rough level of interest rates. Maybe they
should be dropping a bit in the UK, and I
think that's probably probably likely, But that that backdop's really
important for stars stars of investment, and we've had a
much more normal playing field for value investing and that's
(15:06):
helped the portfolio. And as you might imagine an index
I aim and small cap generally it is probably it's
over endowed with growth type investment opportunities versus sort of
value investment opportunities. And we are focused on you know,
quite a lot of our holies of recovery situations.
Speaker 3 (15:26):
When we first we first get get involved.
Speaker 2 (15:28):
Okay, we go, can we interrupt you again? I have
to interrupt you again to ask you to to ask
you to define value for us. In that we hear
a lot from people about I'm a value investor, I'm
a growth investor, I'm a quality growth investor, et cetera,
et cetera, And of course they all overlap and in
many ways everyone really means the same thing. Because anyone
who's buying calls themselves a growth investor, they still think
(15:49):
they're getting value right, or they wouldn't be doing it.
So how are you described, how are you defining value?
And you say you're a value investor, Well.
Speaker 4 (15:58):
We think that DCFS is very dangerous, but that they
but that the concept of DCFI businesses work, its future
free cash plays discounted back to today is the right
way of thinking about value.
Speaker 3 (16:13):
But we also think.
Speaker 4 (16:14):
It's very very difficult for investors to have any idea
whatsoever's going on a few years. Hence, so basically we
focused on the free cashbow generating ability of a business
in the next few years. Often when it's not generating
free cash and valued as if it doesn't generate any
or it won't even exist, and then we kind of
(16:34):
discount back the nearer term free cash flows, and in
that regard we also look at like real asset value
linked to that. So half the portfolio in Rockwood is
training on a discount to book value, which which you know,
which Warren Buffett gave up on about thirty years ago
because it weren't enough stocks training at a discount book
value for him to buy. But you can buy another
(16:57):
quite a few stocks these days on discounts to book value.
Speaker 2 (17:02):
Okay, that gus a good sense of that, and apologies
for interrupting. You can now go back to telling us
what you were about to tell us about the different
reasons why you think you've succeeded.
Speaker 4 (17:12):
So the final piece I think is really really critical
to why the performance has been is they were also active,
so we called it constructive engagement. We're not sort of
haranguing people most of the time, but we are. We
do take stakes. We actually lean into the permanent capital
and we build up stakes and then we work we
(17:33):
work out what needs to change or evolve for for
for value, to be unlocked or created or recovered, and
essentially we then will we'll reach out to other stakeholders
in the first instances that you know management and the board,
but regularly to other shareholders and who are typically in
(17:55):
the sorts of things we invest in sort of pretty
upset generally and sort of up for it, and to say, look,
we think, you know, these sort of changes might be
a good idea. What you think and they sort of say, well,
we agree with abn C, we're not quite sure about D.
And then we might evolve what we're thinking, and then
we'll sort of do the quite heavy lifting and sort
of agitate to try and catalyze stuff to happen.
Speaker 3 (18:18):
And that that I.
Speaker 4 (18:19):
Think, you know a number of instances has helped generate
returns for the fund rather sort of sitting there and
hoping that one day to the UK small cat goes up.
Speaker 2 (18:29):
Basically, so, when the managing director of a listed smaller
company in the UK sees you on their share register,
do they think this is great, I'm going to get
some good advice about how to improve things here, or
do they have some sleepless nights.
Speaker 4 (18:44):
I think it probably depends on the situation. I know,
if you rang up a number of our CEOs. For instance,
if you rang up Adolfo Hernandez, who's the new CEO
of Capita form a foty one hundred company, but now
any list valued at about three hundred and fifty million,
we bought it when it got down to two hundred
and twenty million. Or Ian Percival at try Fast which
(19:06):
is the nuts and Bolts Fast and that's been listed
for twenty years. Or Ian McNaught at Vanquist Banking, who
was who's the new CEO what formerly was formerly called
Provident Financial. They would all say it's been a really
positive and constructive experience with.
Speaker 3 (19:27):
Us.
Speaker 4 (19:27):
I know they do tend to start to think because
what happens is it's just it's normal. It's repeatab all this.
It's how it's the life cycle that companies go through.
So they you know, everything's going swimmingly, let's say the
returns are fine, but then you get this period of complacency,
or they do a rubbish acquisition that they shouldn't really
have done. Often with debt, you know, golden sacks have
(19:49):
come in and told them.
Speaker 3 (19:50):
To do something for lots of fees. It's all gone wrong.
Speaker 4 (19:53):
The returns and profitability collapses, and then you get this
sort of de rating of the shares. Everyone's very upset.
The narrative's negative it completely. People are kind of know
this needs to be changed, but often people just have
put it off. They don't do it. The CEO might
know it's actually not him, it's the finance director that's
let him down, or it may be this obvious he
knows he's for the chop anyway, and really it's an
(20:13):
easy conversation and we're just catalyzing what's going to happen,
and sometimes change like that happens. But if you take
a good example Lisa Jacobs, who's a fantastic CEO at
Funding Circle, which was listed actually a good example listed
as an IPO by Goldman Sachs a number of years
ago one and a half billion pound market cap.
Speaker 3 (20:34):
We were able to.
Speaker 4 (20:35):
Buy that a discount to net cash about a year
a year and a half ago, and we started building
our position and we started engaging with them about why
they weren't using the excess cash they clearly had to
buy back stocks, why the board still had so many
people on it even though the market cap become right
back down again, why they hadn't done any more significant
(20:58):
cost cutting than just sort of tinking around around the edges.
And actually it was all very constructive, and before we
had to get sort of upset or anything like that,
they basically started doing all these things and are very
you know, it's been great.
Speaker 3 (21:09):
For all shareholders. Essentially.
Speaker 4 (21:11):
The other thing that's important is we do do we
We really try our best to do it without sort
of giving lots of sort of in the public domain stuff,
So we keep our arguments quiet for as absolutely long
as possible.
Speaker 2 (21:39):
Let's talk about the current portfolio. You're clearly fundamental, bottom
up value driven, but do you see any themes emerging
in it? And I look, you've got a few defense companies,
for example, in the top ten.
Speaker 4 (21:51):
Now I think you might answer that question. The thing
is because it's it's fair enough. Because you know, I
always I have this phrase this. I made this one up.
Actually I don't myself with many things, but I call
it themes for dreams. And this is because themes it
is because humans love a good story and it kind
of simplifies much more complicated matters for them. And so
(22:13):
you can almost never really let go of something if
it's in a theme, so I think it's quite dangerous,
so we think about stuff in kind of life cycles.
Speaker 3 (22:21):
Now it is true, just to be clear.
Speaker 4 (22:23):
That we've ended up with bits and bobs of defense exposure,
but probably not enough to say, oh, we've got a
big bet on defense. And that's because, for instance, one
of our massive winners we've had as a company called Filtronic,
and Filtronic are doing components into SpaceX's Starlink satellite platform.
(22:43):
And in fact we still think it's the only share
that Elon Musk's bought in the UK, which is pretty exciting.
We actually bought it at twelve p and we bought
five percent of the company and Elon brought in at
thirty five P, so we were quite quite happy about that.
Speaker 3 (22:57):
If I ever get to meet him, we'll have to
sort of be smug okay.
Speaker 2 (23:00):
So that one bet will have been. There has been
a big factor in your app performance.
Speaker 4 (23:04):
That has been a huge that's been a significant factor.
Filterronics been a massive factor of funding Circle Gallaford, Try
Restore now Capita a number of Filterronics being good, but
we've had a number of multi bag and over the years.
If the nature of this kind of a portfolio that
returns are driven by six or seven stocks over any
(23:26):
kind of three for five year period period.
Speaker 2 (23:28):
What have you got in the portfolio at the moment
that you're most excited about. What's your next ten bagger?
Speaker 1 (23:34):
Oh?
Speaker 4 (23:35):
Ten bag is impossible to see the all right, fine, okay.
Speaker 3 (23:39):
Okay, okay, okay.
Speaker 4 (23:41):
So remember like the target return is one hundred percent
over three to five years. Okay, So in that regard,
there's quite a few in the in the portfolio that
we think can do that. One that we've already made
a decent return that's got a lot more coming for
it is actually the largest holding this company called RM SO.
RM is an education business has three divisions and it
(24:01):
actually sort of one of its visions supply schools with
triculum based aids and teaching aids. And the second division
does technology for schools outsourced for groups of schools and
runs the broad band and the tech tech for the schools.
Pretty low margin that business, but public sector facing a
decent contracts. And then the third business is the really
exciting business, which is a it does assessment for schools.
(24:23):
They have the contracts to mark the exams for International
Baccalaureate Icaw County Exams, China tax exams, Cambridge Assessment.
Speaker 3 (24:32):
They do. They do all these exams.
Speaker 4 (24:34):
And those IB have given them a massive contract as
well as Cambride Assessment to digitalize that process over the
next few years into a platform which is going to
become a very valuable platform that will become very sticky
and highly profitable.
Speaker 3 (24:49):
We've built up a really big state, like sixteen percent
of the company. We've proposed a director who went onto
the board. Oh, just to remind you, so in terms
of our active stuff, we've got ten board positions people
either proposed or actually we've you know, we've actually got
a board seat that's a rock with border. Mostly we
propose people who then we're comfortable with. But we've got
ten board seats of the twenty five holdings in our
(25:12):
iron got aboard seat. And basically they've announced recently, which
is what we've been asking them for some time to do,
is they're going to sell off those the first two
divisions I mentioned, which will pay down their excess debt
that they've got, should move the business into a net
cash position, and then allow the butterfly of this assessment
business to sort of emerge. We think the.
Speaker 4 (25:32):
Assessment business is worth at least one hundred and fifty million,
probably more in time as it matures and more clients
come onto it, and that will be quite an exciting.
Now that's the kind of stuff that business is valued,
that one hundred and ten million. Most mainstream fund managers
won't look at it, you know, and we know when
they do. Some of them way like the Factor's got
(25:52):
amounts of a decent amount of debt since we've since
we've invested in it. We've got a new CEO, new CFO,
new head of transformation, new head of HR, new heads
of all three divisions, and they've announced officially now that
those other divisions are.
Speaker 3 (26:07):
A non core, so we think, and they're cracking on
with it.
Speaker 4 (26:10):
So we think we'll see those catalysts during twenty twenty
six that sch nonlock the value in that share in
an era period. I also think if I mentioned earlier,
but I do think it's quite an exciting story in
one many many of the listens they probably if they
haven't heard of the stock Capita they I'm afraid sadly
they may have to use their services in one way
(26:30):
or another. The reason I say that Capita manages lots
of public sector contracts for the government, like all the
ones we hate so like the congestion charge and the
TV license, and it does sort of it does a
big contract for primary care GP back office. What else
is the student loan company? All these sorts of things,
(26:51):
and it was a huge stock for t to one hundred,
went completely wrong, ended up with far too much debt,
real mess, accounting problems, you name it, cyber attacks.
Speaker 3 (27:01):
Basically you can come up with anything else that could
have gone wrong.
Speaker 4 (27:05):
But after quite a period of restructuring and sort of
sorting all that mess out, they in particular a long
disposal program which paid down all the debt, paid down
all the pension fundation deficit issues. It's now emerging, and
believe it or not, it's becoming almost sort of tentatively
not sure I should use this this acronym, but it's it's.
Speaker 3 (27:26):
Basically becoming AI AI. So you'll understand why why I'm tenalid.
Speaker 4 (27:32):
Essentially, they do a lot of business process outsourcing capital
both of the private sector and the public sector. And
this is rather than working out exactly this is totally
an area where AI is going to have a massive
help for how their clients benefit from AI, but also
how you deliver on those contracts in a more profitable way.
So Capita we think is going to start generating cash
(27:54):
and the net for the first time in years, and
then like it probably should be this quarter roughly now
as you move into next year, they should be able
to do some further There's a little bit of final
portfolio structuring. They've got a loss making business they need
to exit. It's actually just one contract that needs to go,
but it's heavily loss making. And then the public sector
division we think will come into full view to mainstream
(28:18):
investors now that business, actually the public sector, which has
most of those contracts I mentioned, it has one point
three billion of sales and makes an eight percent margin,
which it converts about seventy five percent into cash. We
think that divisional loans worth at least nine hundred million
quid and actually the debts down at a capita it's
(28:40):
on a p of about seven or something like that,
you know, So that that's another one we think could
probably double triple from here if the new team that
sort of solved it.
Speaker 2 (28:51):
Okay, interesting, thank you. Can I ask you about M
and A, which has been again one of the One
of the drivers in this market has been the mergers
and acquisitions. Companies leaving the market to go private and
companies merging. So we've seen a kind of general shrinkage
of the number of listed companies, particularly at the lower
end right, and we haven't seen that pipeline being we've
(29:12):
filled with new IPOs. Now we here constantly every quarter
we are told that the next quarter is going to
be the quarter of IPOs. It's all coming back. I
wonder how you see that three ways.
Speaker 4 (29:26):
Firstly, actually this quarter has actually started to pick up genuinely.
So last year was the worst year since nineteen ninety
four or something that there were three IPOs. The first
half of this year was actually terrible. I think there's one.
We've just had two or three, and just seems to
be a view that the market is just gradually opening.
(29:49):
I'm our strategy won't invest in IPAs. We never never
have lots, but most people do so that that's fine,
and there are lots of ways of having winning portfolio.
We just don't like IPOs because basically they choose the
time they choose to do it is when they think
is the best time to do it, and they're never
going to choose it when the valuation is the lowest
point in the cycle and they don't have any history
(30:12):
of earnings.
Speaker 3 (30:13):
And that's again a bit dangerous, you know, but you
know they're exciting.
Speaker 4 (30:17):
It's an easy way for the big funds to deploy
get cash into the market because they hate buying things
in the market because everyone finds out they're doing it
and then pushes the prices up on them, so they
prefer to deploy straight into an IPO. So I think
that is starting to come back. I think there has
been a huge amount of work. It's all quite boring
(30:38):
stuff which the general public shouldn't really you know, bore
themselves with, But there have been quite a lot of
changes and reforms to the listing regime and no other
bits and bobs that everyone's been working on during this
sort of problematic market the last couple of years. I
think are probably just starting to pull together in the
ingredients which sort of get people to move. I did
(30:58):
see a very interesting piece of research the other day
that shared of the I think of the I've actually
I wrote it down. I couldn't believe I've written it down. Yeah,
I think, yeah, of this of the fourteen companies that
actually listed in the last couple of years in America
that were basically it should have been there were sort
of British.
Speaker 3 (31:17):
That went to America.
Speaker 4 (31:18):
Instead of those, only three of three have gone up,
which was arm seven have gone down, and ten have
gone bust.
Speaker 2 (31:25):
Because they all listed at too higher price.
Speaker 3 (31:29):
And just gone for it.
Speaker 4 (31:31):
We have been a bit through this before in the
in UK small CapMan general in the UK market after
the TMT bust, when I first started investing, there was
a sort of fallow period where no one's had the
you know, the gumption to get going and then and
then then it picks up relatively quickly.
Speaker 3 (31:44):
That the backlog must be big, particularly from private exity.
Speaker 4 (31:48):
You mentioned earlier that those guys really do need to
job on a number of their investments in order to
close out their funds.
Speaker 3 (31:55):
But I was going to just I would mention this
is that like the overall.
Speaker 4 (31:59):
Situation on the UK and the sort of the situation,
it is a bit like the ingredients of the cake
are all there now. So the House of Commons pension
scheme has one and a half percent in UK equities
right UK two is in generated down to like four
percent or three or four percent rather than forty.
Speaker 3 (32:18):
The sellers are sort of gone yeah or pretty much gone.
Speaker 4 (32:20):
Yeah. The performance has been terrible, it hasn't which is
a good starting. That's a good ingredient, and performance having
been terrible rather than being great. The valuations are attractive.
Speaker 3 (32:29):
Yeah.
Speaker 4 (32:30):
The leverage is now low, definitely in corporate, corporate and
also actually UK consumers. You know, balance sheets are in
good position and expectations are relatively low. Private equity and
trade buyers are as you just said that kind of
highlighting that there's there's value here.
Speaker 3 (32:47):
Interest rates probably are gradually falling.
Speaker 4 (32:49):
Obviously inflation has been a bit sticky, but you know,
we can all speculate that I suspect this this this
budget might help inflation fall rather than accelerate inflation, be
my guess that That said, with public sector wages running
at five point seven percent this year, I mean, that's
not really helpful to get your interest rates down. Government
needs to really think carefully, carefully about that. So every
(33:11):
poem's come there, All the ingredients are there, and all
we now need is for Rachel Reeves to sort of
turn the oven on basically with a bit of government
help and then and then we're off.
Speaker 2 (33:21):
And how do you expect her to do that by
changes to the ice of rolls or shifts and the
percentage that pension funds have to keep in UK gould
teach those she's.
Speaker 3 (33:28):
Really cold and she wants to be remembered because she
may think that whatever I do.
Speaker 2 (33:33):
Oh, I think she's going to be remembered. I think
she's going to be remembered.
Speaker 3 (33:36):
But if she wants to remember any if she's got
anything to say.
Speaker 4 (33:38):
She did positively afterwards, and if she thinks that like
basically this is the last role for her, maybe could
be her last budget, even if it's the right budget.
If you see what I mean, yeah, then a good
thing's been remembered. Decent UK equities of positive measures. Obviously
the ier measure is basically neutral, so it's a tax
neutral measures and that the Treasury can't come plain about it.
(34:00):
You just say, look, if you want any future tax
breaks for ices, it's going to be invested in the
UK and UK focused investment trust and UK stock market.
Speaker 3 (34:12):
On the pensions, I think it's harder, but I think it's.
Speaker 4 (34:15):
Still if you really wanted to go for it, you
know that they've leaked this sort of potential po as
you of saying on DC defaults that in the first instance,
DC defaults have to have twenty five percent and then
you can opt out.
Speaker 2 (34:27):
You know.
Speaker 4 (34:27):
The reason why they do that is apparently the stats
are like ninety nine percent of people fill in their
pension fund forms in less than twenty seconds and just
do tikt tick ticks. So you'd probably end up with
quite a lot of ending up going in. But the
key here, moment I think the point is is it's
about if we think about where the US market is
now right and how it's got to where it is
(34:48):
over the last period, and why the UK is where
it is now, and the thinking of people that are
investing now, they're not they're investing in the US are
because it's been performing well. They don't really care about
the valuation they brought into the story. But it's really
the momentum that's key. Yeah, all we need to do
(35:09):
is start that momentum. And actually, as you mentioned, every
foot to one hundred has already started a bit. Just
start a bit of momentum and the rest will just
saw itself out. I actually literally believe that people or
it just it just the momentum just will build on
itself and we'll start to get this rerating and that
will bring more companies to market. And you know, the
private ecty guys could could relist loads of companies over
(35:32):
the next few years if the market conditions were conducive
to that.
Speaker 2 (35:36):
Well, it is true, isn't it. All study show that
the greatest investment method of all time is value plust momentum.
Speaker 4 (35:42):
Yeah, yeah, And it's something It's something I you know,
I have to say, I'm always learning and you know
the whole time in this, in this you know, the
moment you think you know or you get kicked in
the nuts basically, and the reality is that I wish
I'd learned it earlier. But if you if your kind
of DNA is value, which might which mine is? You know,
value investors typically always sell their stocks too early and
(36:04):
don't because they think momentums like sort of a dirty
habit that, you know, sort of something you shouldn't really,
you know, you don't want to. You want to have
a purest return, and you know, you buy it super cheap,
you know, and when everyone else is sort of behaviorally
can't stand it, and then you sell it to them.
But you kind of running your winners is something I
(36:24):
learned about halfway through my career, and that's definitely helped
me get a bit better. One of the cool things
about Rockwood actually is that we can really do that.
So I think what didn't help me with making that
learning was that in OIKE funds, which I mainly ran,
and pension funds around and punch of funds before, is
that you you sort of run your winner.
Speaker 3 (36:41):
But because the kind of liquidity and kind.
Speaker 4 (36:42):
Of portfolio construction rules around those sorts of funds, you
just you're always sort of chipping away at the top
of the position, just trimming away at it, and you
never really can pound up the whole the whole thing.
So in Rockwood, we're quite happy to run run our
winners up, which we've mainly done brilliant.
Speaker 2 (37:00):
Well, thank you very much. I think we've covered a
lot of ground there in half an hour. Well, don't
ask Can I ask you one last question? What are
you reading?
Speaker 4 (37:08):
Oh my god, Oh my god, it's really sad people
that know me. I'm actually got three on the go.
I'm reading some I'm read I kind of even because
I've got the sets I'm reading some PG Woodhouse again
at the moment.
Speaker 2 (37:24):
I think it's something like very calming, beans.
Speaker 4 (37:27):
Crumpets and whatever. It's kind of quite fun. It's such
such great writing I'm reading. I've just started Sorkin's new
book that's just out in nineteen twenty nine, and I
had the I had the pleasure in honor of going
to a talk by Charles Moore recently, who's written who
(37:49):
read the biography of Margaret Margaret Thatcher, and I was
rereading that because you know, it doesn't matter what your
political things are, we definitely need kind.
Speaker 3 (37:58):
Of like difficult leadership that she was prepared to do
in this country.
Speaker 4 (38:05):
You know, in my in my opinion that now you
people that kind of don't mind being unpopular basically for
their for what they really believe in and have beliefs.
Speaker 2 (38:15):
Brilliant recommendation. Thank you very much. Thank you, thanks for
listening to this week's Marion Talks Money. If you like
our show, rate review, and subscribe wherever you listen to podcasts,
and keep sending questions or comments to Merorn Money at
Bloomberg dot net. You can also follow me and John
on Twitter. All exam at Marinus w and John is
(38:36):
John Underscore Steppe. This episode was hosted by me Maren
Zumbset Web. It was produced by Summersaudi and Moses and
sound designed by Black Maples and Kelly Garry. Special thanks
to Richard's dably
Host
Merryn Somerset Webb
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Ruthie's Table 4
For more than 30 years The River Cafe in London, has been the home-from-home of artists, architects, designers, actors, collectors, writers, activists, and politicians. Michael Caine, Glenn Close, JJ Abrams, Steve McQueen, Victoria and David Beckham, and Lily Allen, are just some of the people who love to call The River Cafe home. On River Cafe Table 4, Rogers sits down with her customers—who have become friends—to talk about food memories. Table 4 explores how food impacts every aspect of our lives. “Foods is politics, food is cultural, food is how you express love, food is about your heritage, it defines who you and who you want to be,” says Rogers. Each week, Rogers invites her guest to reminisce about family suppers and first dates, what they cook, how they eat when performing, the restaurants they choose, and what food they seek when they need comfort. And to punctuate each episode of Table 4, guests such as Ralph Fiennes, Emily Blunt, and Alfonso Cuarón, read their favourite recipe from one of the best-selling River Cafe cookbooks. Table 4 itself, is situated near The River Cafe’s open kitchen, close to the bright pink wood-fired oven and next to the glossy yellow pass, where Ruthie oversees the restaurant. You are invited to take a seat at this intimate table and join the conversation. For more information, recipes, and ingredients, go to https://shoptherivercafe.co.uk/ Web: https://rivercafe.co.uk/ Instagram: www.instagram.com/therivercafelondon/ Facebook: https://en-gb.facebook.com/therivercafelondon/ For more podcasts from iHeartRadio, visit the iheartradio app, apple podcasts, or wherever you listen to your favorite shows. Learn more about your ad-choices at https://www.iheartpodcastnetwork.com
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.