Small, esoteric invesetment trusts with a chequered corporate record are generally best avoided. Rockwood Strategic (LSE: RKW), a trust with market value of just £35m which is trading on a 12% discount to net asset value, is an exception to this rule.
Until six months ago, the trust was called Gresham House Strategic. It had been managed by Richard Staveley, who built a strong investment record, including a return of 59% in the year to March 2021 and 82% over three years. This was despite an extremely generous performance fee of £2.3m (4.4% of net assets) paid to Gresham House for the year and an annual management fee of 1.5% of net assets.
Staveley left Gresham House in May 2021 to join Christopher Mills’ Harwood Capital, which also manages North Atlantic Smaller Companies Trust, Odyssean and several other funds. The directors of what is now RKW agreed to move the management of the trust to Harwood. Gresham House, owning 23% and undoubtedly mindful of the performance fee, fought tooth and nail to keep it.
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Shares were bought back by RKW, leaving a trust with just £40m of net assets, and the Gresham House stake was acquired by Mills and Staveley, which now owns 30%. Staveley’s focus is on growth through compounding returns rather than share issuance, though that is not ruled out. He points out that Mills has built the North Atlantic Smaller Companies Trust from £4m to £700m over 40 years, while retiring half the shares.
Providing direction
Staveley’s aim is to hold up to ten significant stakes accounting for 60% of the portfolio and 15 to 25 smaller positions, all in small-cap stocks. “I am looking for shares that can double in three to five years, implying a compound return of 15% to 25% and where potential exit options are visible,” he says. He aims to take an active approach in the significant holdings, which means “engaging with all stakeholders to de-risk and add value”.
To help with this, he has assembled a formidable investment advisory group, which includes Mills, who has sat on the boards of more than 100 companies in his 45 years in investment and mastered the use of carrot and stick on reluctant management.
“I am not looking for well-run businesses, but undervalued companies that have lost their way and can benefit from strategic redirection,” says Staveley. “This can sometimes involve board or management changes. Ideally, they will be growth companies on a value rating; value investors tend to sell out far too early rather than running their winners.”
The top holding is Crestchic, which accounts for 16% of the portfolio (and of which Harwood funds own 22.5% in total). This is the largest manufacturer and renter of loadbanks (which are used to test the reliability of electrical equipment) outside the US, but it also has a problem business renting oil-drilling equipment. However growth is tied to electrical usage and benefits from the switch to green energy and data centres, so trading is strong and management remains confident.
Centaur Media accounts for 10% (Harwood funds own 30% in total). It publishes The Lawyer, a magazine for legal professionals, and also has a marketing services business that offers an online mini-MBA in marketing. Staveley believes this is a gem that justifies a valuation double the present one. Other large holdings include Flowtech Fluidpower, Pressure Technologies and M&C Saatchi.
It has been a difficult year for small caps but RKW has held up well, with a flat share price and a net asset value down just 3%. Staveley’s record, lower management and performance fees, the backing and experience of Harwood, a market full of unloved small caps and a coherent strategy for generating above-market returns make this a trust to lock away.
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