Rockwood Strategic: Continues to capitalise on the numerous undervalued UK micro-caps

Rockwood Strategic (RKW) has one of the best Performance track records of all UK equity investment trusts. This is largely a result of manager Richard Staveley’s benchmark-agnostic approach of identifying some of the most undervalued companies listed at the lowest end of the UK market cap spectrum. Performance has been boosted recently by a flurry of M&A activity, pushing near-term returns ahead of his ambitious double-digit annual target return, with longer term returns even better at close to 100% for the five years to 22/09/2026.

Whilst M&A has again been a feature, Richard has been exercising discipline and exiting several positions that have rallied significantly. Proceeds have been used to reinvest into both existing holdings and new opportunities, with cash at a normal level of c. 4% (see Gearing). The manager has identified several attractively valued stocks exposed to UK household spending, which he believes is an area beginning to bottom out, although stocks remain on trough valuations as profits have yet to recover. Whilst these additions have all been a result of bottom-up analysis, the Portfolio now has a notable exposure to the domestic consumer of around 13%. Portfolio turnover remains within normal limits, and the high concentration, high conviction approach is unchanged, with c. 57% in the top ten holdings, and a portfolio of just 25 holdings.

The strong performance has led to a considerable growth in assets, as well as a premium rating. The board has sought to meet shareholder demand through new issuance which has further contributed to asset growth, leading to net assets now topping £200m. We understand there are plans for capacity to be limited in the near future (see Discount).

Whilst the excellent, long-term Performance track-record may be enough to persuade many investors, we believe the way Richard has generated his sector-leading returns is the most compelling part of the RKW investment case.

There have been numerous examples of Richard identifying undervalued micro-cap stocks, taking a sizeable stake and helping to instigate a turnaround. As such, the outcomes of his holdings are not reliant on broader economic issues or market flows, meaning the trust offers considerable diversification potential to even trusts invested in the same asset class. That said, because of his focus on the smallest companies in the index, the portfolio’s holdings are unlikely to even feature in the portfolios of many peers, and almost certainly not included in the few passive vehicles in the space, meaning the trust can offer significant differentiation too versus other approaches.

We believe the recent addition of consumer-exposed stocks is particularly intriguing. Whilst Richard does not invest based on top-down factors, we believe the fact he has identified several good value opportunities with this exposure is interesting and adds to the element of contrarianism to the investment case. As the newer holdings will be the drivers of future growth, this further adds to the differentiation and alpha potential of the trust.