Latest / Merryn Talks Money / Why UK Small Caps Could Soar — Rockwood’s Richard Staveley on Value, Catalysts & Momentum

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Why UK Small Caps Could Soar — Rockwood’s Richard Staveley on Value, Catalysts & Momentum · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Marin Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm Merrit Sunset
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Speaker 2: Web and in this episode we are going to focus
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Speaker 2: on UK smaller companies. Now, any regular listener to this
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Speaker 2: show will know that John and I often talk about
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Speaker 2: why you should be invested in smaller companies. They have
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Speaker 2: a long term record of outperforming. At the moment, particularly
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Speaker 2: in the UK, they are extremely inexpensive. There's a lot
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Speaker 2: of potential there for mean reversion and quite a lot
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Speaker 2: of growth that we are simply not showing enough interesting
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Speaker 2: small caps. Despite all these things, are still described in
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Speaker 2: the UK as one of the most unloved sectors in
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Speaker 2: the world. Why is that? What's going on? When might
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Speaker 2: it change? We have got the perfect guest with us
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Speaker 2: to discuss that. It is Richard's Stavely, manager of the
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Speaker 2: Rockward Strategic Investment Trust, which focuses entirely on very small
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Speaker 2: companies in the UK.
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Speaker 3: Richard.
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Speaker 2: Welcome to Maren Doalks Money.
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Speaker 3: Thank you very much, Marin, great tos be speaking to you.
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Speaker 2: Okay, now, Richard, there's a lot to go through here,
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Speaker 2: but I want to start not by talking about your
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Speaker 2: amazing performance, because your your trust performance in this market
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Speaker 2: has been really fairly spectacular, but talking briefly to set
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Speaker 2: the scene about the UK small cap market in general,
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Speaker 2: It's been awful, hasn't it.
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Speaker 3: Yeah, it's been really bad.
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Speaker 4: I think the AIM market's down thirty seven percent in
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Speaker 4: the last four years to the end of September, and
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Speaker 4: Footsy's small not quite as bad, but it's a bit
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Speaker 4: of a rubbish index now and he has about one
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Speaker 4: hundred companies in that's still negative over four years. So
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Speaker 4: it has been really really difficult period. The interesting point, obviously,
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Speaker 4: and it has been me made some time by UK
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Speaker 4: smaller companies managers, is actually the longer term record going
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Speaker 4: back to nineteen fifty five, over pretty much any reasonable
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Speaker 4: time horizon, or at least someone's normal time horizon, shows
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Speaker 4: the UK small caps basically and indeed small companies across
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Speaker 4: the world outperform their larger, larger companies. So this has
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Speaker 4: kind of been a very strange phase or an elongated
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Speaker 4: phase of underperformance.
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Speaker 2: Yeah, I mean, something goes right back. Do you remember
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Speaker 2: the old Jim Slater phrase elephants don't gallop right if
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Speaker 2: you want to make the real money, you need to
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Speaker 2: be in small caps. But if you told that to
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Speaker 2: a young investor today that historically small cups of outperformed
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Speaker 2: larger companies, they look at you like you're the crazy
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Speaker 2: one because they have no experience of this.
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Speaker 4: Yeah, I think that's true. But I think what I
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Speaker 4: would say to that younger investor, or maybe someone who
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Speaker 4: hasn't invested much or not done much of their stock
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Speaker 4: market history is actually the worst points to investor or
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Speaker 4: often in the peaks of market phases, when the largest
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Speaker 4: companies become the epitomes of those. So if I think
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Speaker 4: through my career, I mean I started, I became a
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Speaker 4: fund manager and an investor in nineteen ninety nine, right
3:07
Speaker 4: the sort of peak of the TMT bubble, and obviously
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Speaker 4: both the Internet and mobile phones had become ubiquitous, well
3:15
Speaker 4: becoming u bictures that point a great development for humanity,
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Speaker 4: but a huge amount of capital was basically spent, which
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Speaker 4: everyone thought all the companies that invested it were going
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Speaker 4: to make a huge fortune from and many of them didn't,
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Speaker 4: And brands like Nokia don't even exists anymore, but they
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Speaker 4: were the biggest companies. You will forward through to the
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Speaker 4: mining cycle and what happens there. Everyone ends up investing
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Speaker 4: in Glencore and Rio Tinto because China's joining the world economy,
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Speaker 4: and obviously that overall actually has been good for the
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Speaker 4: overall amount of economic activity in the world. And again
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Speaker 4: Anglo Americans buying copper mines at the top in Brazil
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Speaker 4: and having to write off billions billions later you will
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Speaker 4: faward through to the financial crisis, and then what happens there
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Speaker 4: there's huge amounts of financial you know, well, alchemy is
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Speaker 4: probably the wrong word for it, but let's say innovation,
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Speaker 4: but innovation as well, and I think that's the point.
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Speaker 4: I was looking at innovation about how to segment risk
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Speaker 4: and do different types of lending and make more products
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Speaker 4: available to other people. And again who which In the
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Speaker 4: run up to the crisis, the bank shares have been
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Speaker 4: extremely strong.
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Speaker 3: We're on huge multiples of.
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Speaker 4: Books, huge sucking capital and a kind of that's kind
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Speaker 4: of what's happening now clearly in America with huge concentration
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Speaker 4: into stocks that are investing huge amounts into AI and
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Speaker 4: are now being valued on very high multiples of future
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Speaker 4: projective profitability. That is not the case with UK smaller
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Speaker 4: companies At the moment, there is basically very little profitability
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Speaker 4: being projective for UK smaller companies. No one likes them.
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Speaker 4: Their balance sheets are actually very very strong. They cover
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Speaker 4: a range of industries, many of them touch all kinds
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Speaker 4: of countries and economies around the world, all types of sectors,
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Speaker 4: but definitely not an area where these huge amounts of
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Speaker 4: capital have been sucked into at all.
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Speaker 2: What's pushed them so far out of fashion? I mean,
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Speaker 2: if we look at the large caps in the UK,
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Speaker 2: you know, the Foots one hundred has had an astounding run,
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Speaker 2: really and we keep looking at ten thousand and thinking
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Speaker 2: not long to go now, not long to go No.
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Speaker 2: In fact, by the time this pot is that we
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Speaker 2: may have passed ten thousand. So large caps have been
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Speaker 2: very popular this year, but smaller company is not so much.
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Speaker 2: What makes smaller companies so particularly unattractive to domestic and
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Speaker 2: to international investors.
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Speaker 4: I think there's two aspects to it. And first you're
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Speaker 4: absolutely right, FOOTS one hundred up in dollar terms significantly
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Speaker 4: more than than the SMP this year, and the versus
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Speaker 4: the median SMP significantly more. I mean, it's the sp
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Speaker 4: been driven again by those large caps. I think the
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Speaker 4: main issue is a is liquidity and just the normal
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Speaker 4: flow of time. So typically if when there's a proper cycle,
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Speaker 4: getting large does go first, and then and then as
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Speaker 4: those stocks sort of re rate, money starts to trickle down,
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Speaker 4: more money kind of comes it comes into that market.
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Speaker 4: But I do think a concern about liquidity is definitely
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Speaker 4: the case.
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Speaker 3: Now.
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Speaker 4: One of the reasons why Rockwood has been doing better
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Speaker 4: than everyone else basically in the last two three years
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Speaker 4: is quite a lot of the money, even in UK
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Speaker 4: small companies, is now concentrated in some very large firms.
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Speaker 4: And I think you know many of your listeners maybe
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Speaker 4: maybe they use a wealth manager, and they probably know
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Speaker 4: that their wealth managers merged with another one and they've
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Speaker 4: become bigger, and as a result the funds, as these
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Speaker 4: funds become bigger and the money's more concentrated, they find
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Speaker 4: it difficult to allocate to smaller markets and indeed smaller
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Speaker 4: funds generally in fact, which Brockwood is one. So that
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Speaker 4: liquidity aspect is definitely one of the reasons so far.
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Speaker 4: But as we've seen from all kinds of stuff, gold
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Speaker 4: isn't particularly you know, you I can do synthetics. But
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Speaker 4: and I know you're a bit of a gold bug,
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Speaker 4: but you know, there are lots of other liquid markets
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Speaker 4: which in the end catch a bid and start moving.
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Speaker 4: And when they do, because it's tighter, it tends to
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Speaker 4: be pretty dramatic. And one of the things that I've
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Speaker 4: again experienced during my career, when you come out of
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Speaker 4: more difficult periods, it's pretty fast. When small cap gets moving,
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Speaker 4: you kind of you sort of got to take some
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Speaker 4: of the pain in advance before it before it really moves,
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Speaker 4: because you'll never get it in quick enough. You'll go, oh,
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Speaker 4: I'll come back tomorrow, or come back tomorrow before you know,
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Speaker 4: you know, aim or the foozy small's done.
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Speaker 3: Alreally had a really strong period.
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Speaker 2: Is It also connected to two other things at different
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Speaker 2: terms of the spectrum, one being the rise of passive investing,
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Speaker 2: which tends to automatically shovel flows into the larger companies
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Speaker 2: rather than the smaller and the other being the rise
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Speaker 2: of private equity, which means that money that might previously
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Speaker 2: have gone into listed smaller companies or pushed companies towards
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Speaker 2: IPO stays in the private market. So you've got two
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Speaker 2: ends there which which make a difference to the liquidity
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Speaker 2: and hence to the performance of smaller companies.
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Speaker 3: I think the second, the private acty piece, is definitely
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Speaker 3: the case, and we know with pension fund allocations UK
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Speaker 3: overall itself has massively reduced over the last fifteen twenty years,
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Speaker 3: and within that as a result of small willers as well.
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Speaker 3: The passive piece, I'm not quite as sure abo because
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Speaker 3: it's all sort of in proportions.
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Speaker 4: So we were delighted earlier this year Rockford joined the
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Speaker 4: Footsie All Share Index and Footsie Small Gathers and as
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Speaker 4: a result we've now got a few passive guys who
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Speaker 4: bought some Rockford shares and a benefit benefiting from it.
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Speaker 4: So I'm not so sure passive. I think what the
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Speaker 4: passive piece does it helps active managers, which dominate UK
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Speaker 4: small companies. There are no index trackers for the AIM
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Speaker 4: Index or the Footsie Smallerness.
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Speaker 3: I think the passives make active.
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Speaker 4: Investment easier, but they may make it slower for the
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Speaker 4: kind of intrinsic value to come out because the passive
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Speaker 4: money's done.
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Speaker 3: If you see what I.
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Speaker 4: Mean, the proportion of the proportion of passive money, it
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Speaker 4: doesn't it doesn't catalyze a change or unlock value in itself,
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Speaker 4: very different to how Rockwood, for instance, approaches things.
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Speaker 2: Okay, so that sets up the general misery in the market.
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Speaker 2: And now if we look at your own performance, it's
9:17
Speaker 2: something completely different. I mean, I'm looking at your fact
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Speaker 2: sheet from thirtieth September, so a bit out of date,
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Speaker 2: but this is the end of the of the third
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Speaker 2: quarter only for comparison purposes. So if you look back
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Speaker 2: over thirty six months, you're on total shareholder return of
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Speaker 2: ninety nine point seven percent, net asset value return ninety
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Speaker 2: three point nine percent, whereas the fits you small not
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Speaker 2: including other investment trust is thirty one percent, and the
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Speaker 2: aim all share is minus three percent. So you've outperformed
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Speaker 2: everyone else hugely. Let's talk about the factors that made
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Speaker 2: that possible.
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Speaker 3: Okay, Well that's very kind of. Yeah. So there's some
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Speaker 3: different aspects.
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Speaker 2: No kind, we are not kind on this podcast. This
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Speaker 2: is not kind.
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Speaker 4: It's just you know, the performance, to put it that way,
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Speaker 4: because I don't like talking about it myself, So it's
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Speaker 4: very kind of.
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Speaker 3: Yeah.
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Speaker 4: So it's basically because we're taking a differentiated approach, and
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Speaker 4: the aspects that are different are pretty simple. Firstly, we
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Speaker 4: don't have a benchmark. We as we don't look at
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Speaker 4: the be any of the possible benchmarks.
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Speaker 3: We don't care.
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Speaker 4: We don't get paid relative to a benchmark, and benchmarks
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Speaker 4: do drive quite a lot of professional fund manager behavior.
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Speaker 4: What we do is we target stocks specifically that we
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Speaker 4: think can double in value, go up one hundred percent
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Speaker 4: over three to five years. And actually the returns we've
10:37
Speaker 4: done the last three would suggest on average they've been
10:40
Speaker 4: three years, and I was just just going forward for
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Speaker 4: anyone not to get two over excited. You know, five
10:46
Speaker 4: years means you double your money if we do fifteen
10:48
Speaker 4: percent a year, and that's that's kind of what the
10:50
Speaker 4: target is. The second thing is is that we run
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Speaker 4: a very concentrated portfolio, so we have the majority of
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Speaker 4: the capital and the top ten holdings. It's current about
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Speaker 4: sixty two percent of the portfolio is slightly less of
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Speaker 4: the quarter end, but we've supported one of our top
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Speaker 4: ten holdings and are fundraising, so we're up to about
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Speaker 4: sixty three and we only have twenty five holdings in total.
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Speaker 4: Most UK smaller companies funds and this is this is
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Speaker 4: quite critical thing. Actually a maroon they basically have because
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Speaker 4: again of their sort of risk departments, but linked their
11:22
Speaker 4: OICH funds. If you remember back to what sort of caused
11:24
Speaker 4: Woodford to get unstuck, or one of the reasons anyway,
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Speaker 4: was that he had open ended daily liquidity funds and
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Speaker 4: Rockwood is a permanent capital investment trust where the capital
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Speaker 4: stays with us until we lose the contract to run Rockwood.
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Speaker 4: But I can invest knowing I've got that money.
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Speaker 3: Now. The managers that have open ended funds, they have
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Speaker 3: their risk apartments.
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Speaker 4: Sort of tapping them on the shoulders, going, oh, you've
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Speaker 4: bought this little small cap and do you know with
11:47
Speaker 4: the amount of money we've got, it's going to take you,
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Speaker 4: you know, nine months to get out of it if
11:52
Speaker 4: you change your mind.
11:53
Speaker 3: We can't possibly have that because missus.
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Speaker 4: Miggins might ask for a money back tomorrow and he
11:57
Speaker 4: won't be able to give it but give it.
11:58
Speaker 3: Back to her.
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Speaker 4: And actually, in some instances, those that run out OICH
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Speaker 4: funds also run investment trusts, but then choose to run
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Speaker 4: the portfolios almost identically in terms of the names that
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Speaker 4: they own, so they basically transport the liquidity requirements of
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Speaker 4: open ended funds onto investment trusts. So with rockwod we
12:15
Speaker 4: just don't do that. That means that from a concentration perspective,
12:18
Speaker 4: we know real get real bang from our buck.
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Speaker 3: It works both ways. We've got to get it right.
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Speaker 4: But when we get it right, you know, it really
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Speaker 4: impacts that it impacts the fund.
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Speaker 2: Okay, and can I just stop be there to say,
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Speaker 2: just stop be there to say that also means that
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Speaker 2: you have a much wider universe to choose from in
12:32
Speaker 2: that under their dynamics, between the oiks and the trust
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Speaker 2: that you've just been talking about other fund managers, that
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Speaker 2: means that there's a range of the much smaller and
12:39
Speaker 2: less liquid stocks that they wouldn't invest in at all.
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Speaker 3: Correct, That is true, Yeah, that is exactly that is true. Yeah,
12:45
Speaker 3: that's right.
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Speaker 4: We actually limit Interestingly, we slightly then choose to limit
12:51
Speaker 4: our universe because we've found some of the large, even
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Speaker 4: UK smaller companies funds typically don't like investing below two
12:57
Speaker 4: hundred and fifty million, So for Rockwood, we own invest
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Speaker 4: when the company is below two hundred and fifty million
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Speaker 4: market cap. I mean, and some listeners might be quite
13:05
Speaker 4: surprised to hear that. In lots of UK smaller companies
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Speaker 4: funds that their portfolio is invested in multi billion pound companies,
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Speaker 4: which aren't sound very small to my mother anyway. So
13:16
Speaker 4: we're going right to the small and again we do
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Speaker 4: that because they're the most inefficient, you know, so part
13:21
Speaker 4: parts the market is you have the less professional investors,
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Speaker 4: the least amount of research, and your information advantage you
13:27
Speaker 4: can get from extra work, it can become a lot quicker.
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Speaker 4: And that's one of the flip sides people don't remember
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Speaker 4: about concentration is that when you've only got twenty five
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Speaker 4: holdings and you're looking to replace maybe three or four
13:38
Speaker 4: holdings a year maximum, you are you've got a lot
13:42
Speaker 4: more time to do the DD on that one stop
13:44
Speaker 4: you than you would if you're monitoring seventy or eighty
13:48
Speaker 4: holdings that are that are larger fund might have. And
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Speaker 4: I think think that's been helpful for the amount of
13:53
Speaker 4: due diligence we can do on our holdings.
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Speaker 3: To try and improve of our overall hit rate.
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Speaker 4: Now, there are two other aspects which I think and
14:01
Speaker 4: one of them has been useful in the last few
14:05
Speaker 4: years but might not have been quite as useful during
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Speaker 4: the previous fifteen well since the financial crisis, is that
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Speaker 4: we're also unashamably value investors and value investing went through
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Speaker 4: a long period of not really working in the UK
14:18
Speaker 4: due to the sort of extremely low interest rates which
14:22
Speaker 4: undermines value investing. And since interest rates have moved back
14:27
Speaker 4: to there, let's face it, you know, fifty to one
14:29
Speaker 4: hundred year norms, a number of fund managers have found.
14:33
Speaker 2: One thousand year norms.
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Speaker 4: Really, I think, yeah, yeah, there's that great, great the
14:38
Speaker 4: Price of Time book by Chances what I recommend people,
14:41
Speaker 4: really brilliant.
14:41
Speaker 2: But we've had him on the pod Rich, We've had
14:43
Speaker 2: him on the pod Yeah, and.
14:45
Speaker 4: Go listen to that episode straight after he's probably told
14:50
Speaker 4: you you know, so we're back to much more normal
14:52
Speaker 4: and probably sensible rough level of interest rates. Maybe they
14:56
Speaker 4: should be dropping a bit in the UK, and I
14:58
Speaker 4: think that's probably probably likely, But that that backdop's really
15:01
Speaker 4: important for stars stars of investment, and we've had a
15:03
Speaker 4: much more normal playing field for value investing and that's
15:06
Speaker 4: helped the portfolio. And as you might imagine an index
15:11
Speaker 4: I aim and small cap generally it is probably it's
15:14
Speaker 4: over endowed with growth type investment opportunities versus sort of
15:20
Speaker 4: value investment opportunities. And we are focused on you know,
15:23
Speaker 4: quite a lot of our holies of recovery situations.
15:26
Speaker 3: When we first we first get get involved.
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Speaker 2: Okay, we go, can we interrupt you again? I have
15:30
Speaker 2: to interrupt you again to ask you to to ask
15:34
Speaker 2: you to define value for us. In that we hear
15:37
Speaker 2: a lot from people about I'm a value investor, I'm
15:39
Speaker 2: a growth investor, I'm a quality growth investor, et cetera,
15:41
Speaker 2: et cetera, And of course they all overlap and in
15:44
Speaker 2: many ways everyone really means the same thing. Because anyone
15:47
Speaker 2: who's buying calls themselves a growth investor, they still think
15:49
Speaker 2: they're getting value right, or they wouldn't be doing it.
15:53
Speaker 2: So how are you described, how are you defining value?
15:56
Speaker 2: And you say you're a value investor, Well.
15:58
Speaker 4: We think that DCFS is very dangerous, but that they
16:04
Speaker 4: but that the concept of DCFI businesses work, its future
16:08
Speaker 4: free cash plays discounted back to today is the right
16:11
Speaker 4: way of thinking about value.
16:13
Speaker 3: But we also think.
16:14
Speaker 4: It's very very difficult for investors to have any idea
16:18
Speaker 4: whatsoever's going on a few years. Hence, so basically we
16:22
Speaker 4: focused on the free cashbow generating ability of a business
16:25
Speaker 4: in the next few years. Often when it's not generating
16:29
Speaker 4: free cash and valued as if it doesn't generate any
16:32
Speaker 4: or it won't even exist, and then we kind of
16:34
Speaker 4: discount back the nearer term free cash flows, and in
16:38
Speaker 4: that regard we also look at like real asset value
16:41
Speaker 4: linked to that. So half the portfolio in Rockwood is
16:45
Speaker 4: training on a discount to book value, which which you know,
16:49
Speaker 4: which Warren Buffett gave up on about thirty years ago
16:52
Speaker 4: because it weren't enough stocks training at a discount book
16:54
Speaker 4: value for him to buy. But you can buy another
16:57
Speaker 4: quite a few stocks these days on discounts to book value.
17:02
Speaker 2: Okay, that gus a good sense of that, and apologies
17:05
Speaker 2: for interrupting. You can now go back to telling us
17:06
Speaker 2: what you were about to tell us about the different
17:09
Speaker 2: reasons why you think you've succeeded.
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Speaker 4: So the final piece I think is really really critical
17:15
Speaker 4: to why the performance has been is they were also active,
17:18
Speaker 4: so we called it constructive engagement. We're not sort of
17:23
Speaker 4: haranguing people most of the time, but we are. We
17:26
Speaker 4: do take stakes. We actually lean into the permanent capital
17:30
Speaker 4: and we build up stakes and then we work we
17:33
Speaker 4: work out what needs to change or evolve for for
17:37
Speaker 4: for value, to be unlocked or created or recovered, and
17:43
Speaker 4: essentially we then will we'll reach out to other stakeholders
17:48
Speaker 4: in the first instances that you know management and the board,
17:51
Speaker 4: but regularly to other shareholders and who are typically in
17:55
Speaker 4: the sorts of things we invest in sort of pretty
17:57
Speaker 4: upset generally and sort of up for it, and to say, look,
18:00
Speaker 4: we think, you know, these sort of changes might be
18:03
Speaker 4: a good idea. What you think and they sort of say, well,
18:06
Speaker 4: we agree with abn C, we're not quite sure about D.
18:09
Speaker 4: And then we might evolve what we're thinking, and then
18:11
Speaker 4: we'll sort of do the quite heavy lifting and sort
18:14
Speaker 4: of agitate to try and catalyze stuff to happen.
18:18
Speaker 3: And that that I.
18:19
Speaker 4: Think, you know a number of instances has helped generate
18:23
Speaker 4: returns for the fund rather sort of sitting there and
18:25
Speaker 4: hoping that one day to the UK small cat goes up.
18:29
Speaker 2: Basically, so, when the managing director of a listed smaller
18:33
Speaker 2: company in the UK sees you on their share register,
18:37
Speaker 2: do they think this is great, I'm going to get
18:39
Speaker 2: some good advice about how to improve things here, or
18:41
Speaker 2: do they have some sleepless nights.
18:44
Speaker 4: I think it probably depends on the situation. I know,
18:47
Speaker 4: if you rang up a number of our CEOs. For instance,
18:50
Speaker 4: if you rang up Adolfo Hernandez, who's the new CEO
18:54
Speaker 4: of Capita form a foty one hundred company, but now
18:57
Speaker 4: any list valued at about three hundred and fifty million,
19:01
Speaker 4: we bought it when it got down to two hundred
19:02
Speaker 4: and twenty million. Or Ian Percival at try Fast which
19:06
Speaker 4: is the nuts and Bolts Fast and that's been listed
19:08
Speaker 4: for twenty years. Or Ian McNaught at Vanquist Banking, who
19:15
Speaker 4: was who's the new CEO what formerly was formerly called
19:18
Speaker 4: Provident Financial. They would all say it's been a really
19:23
Speaker 4: positive and constructive experience with.
19:27
Speaker 3: Us.
19:27
Speaker 4: I know they do tend to start to think because
19:30
Speaker 4: what happens is it's just it's normal. It's repeatab all this.
19:34
Speaker 4: It's how it's the life cycle that companies go through.
19:38
Speaker 4: So they you know, everything's going swimmingly, let's say the
19:41
Speaker 4: returns are fine, but then you get this period of complacency,
19:44
Speaker 4: or they do a rubbish acquisition that they shouldn't really
19:47
Speaker 4: have done. Often with debt, you know, golden sacks have
19:49
Speaker 4: come in and told them.
19:50
Speaker 3: To do something for lots of fees. It's all gone wrong.
19:53
Speaker 4: The returns and profitability collapses, and then you get this
19:56
Speaker 4: sort of de rating of the shares. Everyone's very upset.
19:58
Speaker 4: The narrative's negative it completely. People are kind of know
20:01
Speaker 4: this needs to be changed, but often people just have
20:03
Speaker 4: put it off. They don't do it. The CEO might
20:06
Speaker 4: know it's actually not him, it's the finance director that's
20:08
Speaker 4: let him down, or it may be this obvious he
20:11
Speaker 4: knows he's for the chop anyway, and really it's an
20:13
Speaker 4: easy conversation and we're just catalyzing what's going to happen,
20:16
Speaker 4: and sometimes change like that happens. But if you take
20:19
Speaker 4: a good example Lisa Jacobs, who's a fantastic CEO at
20:24
Speaker 4: Funding Circle, which was listed actually a good example listed
20:28
Speaker 4: as an IPO by Goldman Sachs a number of years
20:31
Speaker 4: ago one and a half billion pound market cap.
20:34
Speaker 3: We were able to.
20:35
Speaker 4: Buy that a discount to net cash about a year
20:39
Speaker 4: a year and a half ago, and we started building
20:41
Speaker 4: our position and we started engaging with them about why
20:46
Speaker 4: they weren't using the excess cash they clearly had to
20:48
Speaker 4: buy back stocks, why the board still had so many
20:52
Speaker 4: people on it even though the market cap become right
20:54
Speaker 4: back down again, why they hadn't done any more significant
20:58
Speaker 4: cost cutting than just sort of tinking around around the edges.
21:01
Speaker 4: And actually it was all very constructive, and before we
21:03
Speaker 4: had to get sort of upset or anything like that,
21:05
Speaker 4: they basically started doing all these things and are very
21:08
Speaker 4: you know, it's been great.
21:09
Speaker 3: For all shareholders. Essentially.
21:11
Speaker 4: The other thing that's important is we do do we
21:13
Speaker 4: We really try our best to do it without sort
21:17
Speaker 4: of giving lots of sort of in the public domain stuff,
21:20
Speaker 4: So we keep our arguments quiet for as absolutely long
21:24
Speaker 4: as possible.
21:39
Speaker 2: Let's talk about the current portfolio. You're clearly fundamental, bottom
21:44
Speaker 2: up value driven, but do you see any themes emerging
21:47
Speaker 2: in it? And I look, you've got a few defense companies,
21:49
Speaker 2: for example, in the top ten.
21:51
Speaker 4: Now I think you might answer that question. The thing
21:54
Speaker 4: is because it's it's fair enough. Because you know, I
21:56
Speaker 4: always I have this phrase this. I made this one up.
21:58
Speaker 4: Actually I don't myself with many things, but I call
22:02
Speaker 4: it themes for dreams. And this is because themes it
22:07
Speaker 4: is because humans love a good story and it kind
22:09
Speaker 4: of simplifies much more complicated matters for them. And so
22:13
Speaker 4: you can almost never really let go of something if
22:15
Speaker 4: it's in a theme, so I think it's quite dangerous,
22:18
Speaker 4: so we think about stuff in kind of life cycles.
22:21
Speaker 3: Now it is true, just to be clear.
22:23
Speaker 4: That we've ended up with bits and bobs of defense exposure,
22:26
Speaker 4: but probably not enough to say, oh, we've got a
22:28
Speaker 4: big bet on defense. And that's because, for instance, one
22:32
Speaker 4: of our massive winners we've had as a company called Filtronic,
22:36
Speaker 4: and Filtronic are doing components into SpaceX's Starlink satellite platform.
22:43
Speaker 4: And in fact we still think it's the only share
22:45
Speaker 4: that Elon Musk's bought in the UK, which is pretty exciting.
22:49
Speaker 4: We actually bought it at twelve p and we bought
22:51
Speaker 4: five percent of the company and Elon brought in at
22:54
Speaker 4: thirty five P, so we were quite quite happy about that.
22:57
Speaker 3: If I ever get to meet him, we'll have to
22:58
Speaker 3: sort of be smug okay.
23:00
Speaker 2: So that one bet will have been. There has been
23:02
Speaker 2: a big factor in your app performance.
23:04
Speaker 4: That has been a huge that's been a significant factor.
23:06
Speaker 4: Filterronics been a massive factor of funding Circle Gallaford, Try
23:11
Speaker 4: Restore now Capita a number of Filterronics being good, but
23:17
Speaker 4: we've had a number of multi bag and over the years.
23:19
Speaker 4: If the nature of this kind of a portfolio that
23:23
Speaker 4: returns are driven by six or seven stocks over any
23:26
Speaker 4: kind of three for five year period period.
23:28
Speaker 2: What have you got in the portfolio at the moment
23:30
Speaker 2: that you're most excited about. What's your next ten bagger?
23:34
Speaker 1: Oh?
23:35
Speaker 4: Ten bag is impossible to see the all right, fine, okay.
23:39
Speaker 3: Okay, okay, okay.
23:41
Speaker 4: So remember like the target return is one hundred percent
23:43
Speaker 4: over three to five years. Okay, So in that regard,
23:46
Speaker 4: there's quite a few in the in the portfolio that
23:48
Speaker 4: we think can do that. One that we've already made
23:51
Speaker 4: a decent return that's got a lot more coming for
23:52
Speaker 4: it is actually the largest holding this company called RM SO.
23:56
Speaker 4: RM is an education business has three divisions and it
24:01
Speaker 4: actually sort of one of its visions supply schools with
24:04
Speaker 4: triculum based aids and teaching aids. And the second division
24:09
Speaker 4: does technology for schools outsourced for groups of schools and
24:12
Speaker 4: runs the broad band and the tech tech for the schools.
24:14
Speaker 4: Pretty low margin that business, but public sector facing a
24:17
Speaker 4: decent contracts. And then the third business is the really
24:19
Speaker 4: exciting business, which is a it does assessment for schools.
24:23
Speaker 4: They have the contracts to mark the exams for International
24:27
Speaker 4: Baccalaureate Icaw County Exams, China tax exams, Cambridge Assessment.
24:32
Speaker 3: They do. They do all these exams.
24:34
Speaker 4: And those IB have given them a massive contract as
24:38
Speaker 4: well as Cambride Assessment to digitalize that process over the
24:42
Speaker 4: next few years into a platform which is going to
24:44
Speaker 4: become a very valuable platform that will become very sticky
24:47
Speaker 4: and highly profitable.
24:49
Speaker 3: We've built up a really big state, like sixteen percent
24:51
Speaker 3: of the company. We've proposed a director who went onto
24:55
Speaker 3: the board. Oh, just to remind you, so in terms
24:57
Speaker 3: of our active stuff, we've got ten board positions people
25:00
Speaker 3: either proposed or actually we've you know, we've actually got
25:03
Speaker 3: a board seat that's a rock with border. Mostly we
25:05
Speaker 3: propose people who then we're comfortable with. But we've got
25:08
Speaker 3: ten board seats of the twenty five holdings in our
25:12
Speaker 3: iron got aboard seat. And basically they've announced recently, which
25:15
Speaker 3: is what we've been asking them for some time to do,
25:17
Speaker 3: is they're going to sell off those the first two
25:20
Speaker 3: divisions I mentioned, which will pay down their excess debt
25:24
Speaker 3: that they've got, should move the business into a net
25:27
Speaker 3: cash position, and then allow the butterfly of this assessment
25:30
Speaker 3: business to sort of emerge. We think the.
25:32
Speaker 4: Assessment business is worth at least one hundred and fifty million,
25:35
Speaker 4: probably more in time as it matures and more clients
25:38
Speaker 4: come onto it, and that will be quite an exciting.
25:40
Speaker 4: Now that's the kind of stuff that business is valued,
25:43
Speaker 4: that one hundred and ten million. Most mainstream fund managers
25:46
Speaker 4: won't look at it, you know, and we know when
25:50
Speaker 4: they do. Some of them way like the Factor's got
25:52
Speaker 4: amounts of a decent amount of debt since we've since
25:56
Speaker 4: we've invested in it. We've got a new CEO, new CFO,
26:00
Speaker 4: new head of transformation, new head of HR, new heads
26:02
Speaker 4: of all three divisions, and they've announced officially now that
26:05
Speaker 4: those other divisions are.
26:07
Speaker 3: A non core, so we think, and they're cracking on
26:10
Speaker 3: with it.
26:10
Speaker 4: So we think we'll see those catalysts during twenty twenty
26:13
Speaker 4: six that sch nonlock the value in that share in
26:16
Speaker 4: an era period. I also think if I mentioned earlier,
26:19
Speaker 4: but I do think it's quite an exciting story in
26:21
Speaker 4: one many many of the listens they probably if they
26:25
Speaker 4: haven't heard of the stock Capita they I'm afraid sadly
26:28
Speaker 4: they may have to use their services in one way
26:30
Speaker 4: or another. The reason I say that Capita manages lots
26:33
Speaker 4: of public sector contracts for the government, like all the
26:36
Speaker 4: ones we hate so like the congestion charge and the
26:40
Speaker 4: TV license, and it does sort of it does a
26:43
Speaker 4: big contract for primary care GP back office. What else
26:48
Speaker 4: is the student loan company? All these sorts of things,
26:51
Speaker 4: and it was a huge stock for t to one hundred,
26:55
Speaker 4: went completely wrong, ended up with far too much debt,
26:58
Speaker 4: real mess, accounting problems, you name it, cyber attacks.
27:01
Speaker 3: Basically you can come up with anything else that could
27:04
Speaker 3: have gone wrong.
27:05
Speaker 4: But after quite a period of restructuring and sort of
27:08
Speaker 4: sorting all that mess out, they in particular a long
27:12
Speaker 4: disposal program which paid down all the debt, paid down
27:14
Speaker 4: all the pension fundation deficit issues. It's now emerging, and
27:18
Speaker 4: believe it or not, it's becoming almost sort of tentatively
27:22
Speaker 4: not sure I should use this this acronym, but it's it's.
27:26
Speaker 3: Basically becoming AI AI. So you'll understand why why I'm tenalid.
27:32
Speaker 4: Essentially, they do a lot of business process outsourcing capital
27:35
Speaker 4: both of the private sector and the public sector. And
27:38
Speaker 4: this is rather than working out exactly this is totally
27:42
Speaker 4: an area where AI is going to have a massive
27:44
Speaker 4: help for how their clients benefit from AI, but also
27:47
Speaker 4: how you deliver on those contracts in a more profitable way.
27:51
Speaker 4: So Capita we think is going to start generating cash
27:54
Speaker 4: and the net for the first time in years, and
27:56
Speaker 4: then like it probably should be this quarter roughly now
28:00
Speaker 4: as you move into next year, they should be able
28:03
Speaker 4: to do some further There's a little bit of final
28:05
Speaker 4: portfolio structuring. They've got a loss making business they need
28:08
Speaker 4: to exit. It's actually just one contract that needs to go,
28:10
Speaker 4: but it's heavily loss making. And then the public sector
28:13
Speaker 4: division we think will come into full view to mainstream
28:18
Speaker 4: investors now that business, actually the public sector, which has
28:22
Speaker 4: most of those contracts I mentioned, it has one point
28:25
Speaker 4: three billion of sales and makes an eight percent margin,
28:29
Speaker 4: which it converts about seventy five percent into cash. We
28:32
Speaker 4: think that divisional loans worth at least nine hundred million
28:35
Speaker 4: quid and actually the debts down at a capita it's
28:40
Speaker 4: on a p of about seven or something like that,
28:42
Speaker 4: you know, So that that's another one we think could
28:44
Speaker 4: probably double triple from here if the new team that
28:49
Speaker 4: sort of solved it.
28:51
Speaker 2: Okay, interesting, thank you. Can I ask you about M
28:55
Speaker 2: and A, which has been again one of the One
28:57
Speaker 2: of the drivers in this market has been the mergers
29:00
Speaker 2: and acquisitions. Companies leaving the market to go private and
29:03
Speaker 2: companies merging. So we've seen a kind of general shrinkage
29:06
Speaker 2: of the number of listed companies, particularly at the lower
29:09
Speaker 2: end right, and we haven't seen that pipeline being we've
29:12
Speaker 2: filled with new IPOs. Now we here constantly every quarter
29:17
Speaker 2: we are told that the next quarter is going to
29:20
Speaker 2: be the quarter of IPOs. It's all coming back. I
29:23
Speaker 2: wonder how you see that three ways.
29:26
Speaker 4: Firstly, actually this quarter has actually started to pick up genuinely.
29:32
Speaker 4: So last year was the worst year since nineteen ninety
29:34
Speaker 4: four or something that there were three IPOs. The first
29:37
Speaker 4: half of this year was actually terrible. I think there's one.
29:40
Speaker 4: We've just had two or three, and just seems to
29:44
Speaker 4: be a view that the market is just gradually opening.
29:49
Speaker 4: I'm our strategy won't invest in IPAs. We never never
29:54
Speaker 4: have lots, but most people do so that that's fine,
29:57
Speaker 4: and there are lots of ways of having winning portfolio.
30:00
Speaker 4: We just don't like IPOs because basically they choose the
30:03
Speaker 4: time they choose to do it is when they think
30:05
Speaker 4: is the best time to do it, and they're never
30:07
Speaker 4: going to choose it when the valuation is the lowest
30:09
Speaker 4: point in the cycle and they don't have any history
30:12
Speaker 4: of earnings.
30:13
Speaker 3: And that's again a bit dangerous, you know, but you
30:16
Speaker 3: know they're exciting.
30:17
Speaker 4: It's an easy way for the big funds to deploy
30:19
Speaker 4: get cash into the market because they hate buying things
30:21
Speaker 4: in the market because everyone finds out they're doing it
30:25
Speaker 4: and then pushes the prices up on them, so they
30:28
Speaker 4: prefer to deploy straight into an IPO. So I think
30:31
Speaker 4: that is starting to come back. I think there has
30:34
Speaker 4: been a huge amount of work. It's all quite boring
30:38
Speaker 4: stuff which the general public shouldn't really you know, bore
30:41
Speaker 4: themselves with, But there have been quite a lot of
30:44
Speaker 4: changes and reforms to the listing regime and no other
30:48
Speaker 4: bits and bobs that everyone's been working on during this
30:50
Speaker 4: sort of problematic market the last couple of years. I
30:52
Speaker 4: think are probably just starting to pull together in the
30:56
Speaker 4: ingredients which sort of get people to move. I did
30:58
Speaker 4: see a very interesting piece of research the other day
31:00
Speaker 4: that shared of the I think of the I've actually
31:03
Speaker 4: I wrote it down. I couldn't believe I've written it down. Yeah,
31:06
Speaker 4: I think, yeah, of this of the fourteen companies that
31:10
Speaker 4: actually listed in the last couple of years in America
31:13
Speaker 4: that were basically it should have been there were sort
31:16
Speaker 4: of British.
31:17
Speaker 3: That went to America.
31:18
Speaker 4: Instead of those, only three of three have gone up,
31:21
Speaker 4: which was arm seven have gone down, and ten have
31:24
Speaker 4: gone bust.
31:25
Speaker 2: Because they all listed at too higher price.
31:29
Speaker 3: And just gone for it.
31:31
Speaker 4: We have been a bit through this before in the
31:33
Speaker 4: in UK small CapMan general in the UK market after
31:35
Speaker 4: the TMT bust, when I first started investing, there was
31:38
Speaker 4: a sort of fallow period where no one's had the
31:41
Speaker 4: you know, the gumption to get going and then and
31:43
Speaker 4: then then it picks up relatively quickly.
31:44
Speaker 3: That the backlog must be big, particularly from private exity.
31:48
Speaker 4: You mentioned earlier that those guys really do need to
31:50
Speaker 4: job on a number of their investments in order to
31:53
Speaker 4: close out their funds.
31:55
Speaker 3: But I was going to just I would mention this
31:58
Speaker 3: is that like the overall.
31:59
Speaker 4: Situation on the UK and the sort of the situation,
32:03
Speaker 4: it is a bit like the ingredients of the cake
32:06
Speaker 4: are all there now. So the House of Commons pension
32:10
Speaker 4: scheme has one and a half percent in UK equities
32:12
Speaker 4: right UK two is in generated down to like four
32:15
Speaker 4: percent or three or four percent rather than forty.
32:18
Speaker 3: The sellers are sort of gone yeah or pretty much gone.
32:20
Speaker 4: Yeah. The performance has been terrible, it hasn't which is
32:23
Speaker 4: a good starting. That's a good ingredient, and performance having
32:25
Speaker 4: been terrible rather than being great. The valuations are attractive.
32:29
Speaker 3: Yeah.
32:30
Speaker 4: The leverage is now low, definitely in corporate, corporate and
32:33
Speaker 4: also actually UK consumers. You know, balance sheets are in
32:36
Speaker 4: good position and expectations are relatively low. Private equity and
32:41
Speaker 4: trade buyers are as you just said that kind of
32:43
Speaker 4: highlighting that there's there's value here.
32:47
Speaker 3: Interest rates probably are gradually falling.
32:49
Speaker 4: Obviously inflation has been a bit sticky, but you know,
32:52
Speaker 4: we can all speculate that I suspect this this this
32:55
Speaker 4: budget might help inflation fall rather than accelerate inflation, be
32:59
Speaker 4: my guess that That said, with public sector wages running
33:03
Speaker 4: at five point seven percent this year, I mean, that's
33:05
Speaker 4: not really helpful to get your interest rates down. Government
33:08
Speaker 4: needs to really think carefully, carefully about that. So every
33:11
Speaker 4: poem's come there, All the ingredients are there, and all
33:14
Speaker 4: we now need is for Rachel Reeves to sort of
33:16
Speaker 4: turn the oven on basically with a bit of government
33:19
Speaker 4: help and then and then we're off.
33:21
Speaker 2: And how do you expect her to do that by
33:23
Speaker 2: changes to the ice of rolls or shifts and the
33:25
Speaker 2: percentage that pension funds have to keep in UK gould
33:27
Speaker 2: teach those she's.
33:28
Speaker 3: Really cold and she wants to be remembered because she
33:31
Speaker 3: may think that whatever I do.
33:33
Speaker 2: Oh, I think she's going to be remembered. I think
33:35
Speaker 2: she's going to be remembered.
33:36
Speaker 3: But if she wants to remember any if she's got
33:38
Speaker 3: anything to say.
33:38
Speaker 4: She did positively afterwards, and if she thinks that like
33:42
Speaker 4: basically this is the last role for her, maybe could
33:45
Speaker 4: be her last budget, even if it's the right budget.
33:47
Speaker 4: If you see what I mean, yeah, then a good
33:50
Speaker 4: thing's been remembered. Decent UK equities of positive measures. Obviously
33:55
Speaker 4: the ier measure is basically neutral, so it's a tax
33:58
Speaker 4: neutral measures and that the Treasury can't come plain about it.
34:00
Speaker 4: You just say, look, if you want any future tax
34:04
Speaker 4: breaks for ices, it's going to be invested in the
34:08
Speaker 4: UK and UK focused investment trust and UK stock market.
34:12
Speaker 3: On the pensions, I think it's harder, but I think it's.
34:15
Speaker 4: Still if you really wanted to go for it, you
34:17
Speaker 4: know that they've leaked this sort of potential po as
34:19
Speaker 4: you of saying on DC defaults that in the first instance,
34:23
Speaker 4: DC defaults have to have twenty five percent and then
34:25
Speaker 4: you can opt out.
34:27
Speaker 2: You know.
34:27
Speaker 4: The reason why they do that is apparently the stats
34:30
Speaker 4: are like ninety nine percent of people fill in their
34:32
Speaker 4: pension fund forms in less than twenty seconds and just
34:35
Speaker 4: do tikt tick ticks. So you'd probably end up with
34:38
Speaker 4: quite a lot of ending up going in. But the
34:40
Speaker 4: key here, moment I think the point is is it's
34:42
Speaker 4: about if we think about where the US market is
34:45
Speaker 4: now right and how it's got to where it is
34:48
Speaker 4: over the last period, and why the UK is where
34:50
Speaker 4: it is now, and the thinking of people that are
34:55
Speaker 4: investing now, they're not they're investing in the US are
34:58
Speaker 4: because it's been performing well. They don't really care about
35:02
Speaker 4: the valuation they brought into the story. But it's really
35:05
Speaker 4: the momentum that's key. Yeah, all we need to do
35:09
Speaker 4: is start that momentum. And actually, as you mentioned, every
35:12
Speaker 4: foot to one hundred has already started a bit. Just
35:14
Speaker 4: start a bit of momentum and the rest will just
35:17
Speaker 4: saw itself out. I actually literally believe that people or
35:20
Speaker 4: it just it just the momentum just will build on
35:22
Speaker 4: itself and we'll start to get this rerating and that
35:25
Speaker 4: will bring more companies to market. And you know, the
35:28
Speaker 4: private ecty guys could could relist loads of companies over
35:32
Speaker 4: the next few years if the market conditions were conducive
35:35
Speaker 4: to that.
35:36
Speaker 2: Well, it is true, isn't it. All study show that
35:38
Speaker 2: the greatest investment method of all time is value plust momentum.
35:42
Speaker 4: Yeah, yeah, And it's something It's something I you know,
35:44
Speaker 4: I have to say, I'm always learning and you know
35:48
Speaker 4: the whole time in this, in this you know, the
35:50
Speaker 4: moment you think you know or you get kicked in
35:51
Speaker 4: the nuts basically, and the reality is that I wish
35:55
Speaker 4: I'd learned it earlier. But if you if your kind
35:57
Speaker 4: of DNA is value, which might which mine is? You know,
36:00
Speaker 4: value investors typically always sell their stocks too early and
36:04
Speaker 4: don't because they think momentums like sort of a dirty
36:08
Speaker 4: habit that, you know, sort of something you shouldn't really,
36:10
Speaker 4: you know, you don't want to. You want to have
36:12
Speaker 4: a purest return, and you know, you buy it super cheap,
36:16
Speaker 4: you know, and when everyone else is sort of behaviorally
36:18
Speaker 4: can't stand it, and then you sell it to them.
36:20
Speaker 4: But you kind of running your winners is something I
36:24
Speaker 4: learned about halfway through my career, and that's definitely helped
36:27
Speaker 4: me get a bit better. One of the cool things
36:29
Speaker 4: about Rockwood actually is that we can really do that.
36:32
Speaker 4: So I think what didn't help me with making that
36:34
Speaker 4: learning was that in OIKE funds, which I mainly ran,
36:37
Speaker 4: and pension funds around and punch of funds before, is
36:39
Speaker 4: that you you sort of run your winner.
36:41
Speaker 3: But because the kind of liquidity and kind.
36:42
Speaker 4: Of portfolio construction rules around those sorts of funds, you
36:46
Speaker 4: just you're always sort of chipping away at the top
36:48
Speaker 4: of the position, just trimming away at it, and you
36:50
Speaker 4: never really can pound up the whole the whole thing.
36:53
Speaker 4: So in Rockwood, we're quite happy to run run our
36:56
Speaker 4: winners up, which we've mainly done brilliant.
37:00
Speaker 2: Well, thank you very much. I think we've covered a
37:03
Speaker 2: lot of ground there in half an hour. Well, don't
37:05
Speaker 2: ask Can I ask you one last question? What are
37:07
Speaker 2: you reading?
37:08
Speaker 4: Oh my god, Oh my god, it's really sad people
37:15
Speaker 4: that know me. I'm actually got three on the go.
37:19
Speaker 4: I'm reading some I'm read I kind of even because
37:21
Speaker 4: I've got the sets I'm reading some PG Woodhouse again
37:23
Speaker 4: at the moment.
37:24
Speaker 2: I think it's something like very calming, beans.
37:27
Speaker 4: Crumpets and whatever. It's kind of quite fun. It's such
37:30
Speaker 4: such great writing I'm reading. I've just started Sorkin's new
37:35
Speaker 4: book that's just out in nineteen twenty nine, and I
37:40
Speaker 4: had the I had the pleasure in honor of going
37:44
Speaker 4: to a talk by Charles Moore recently, who's written who
37:49
Speaker 4: read the biography of Margaret Margaret Thatcher, and I was
37:52
Speaker 4: rereading that because you know, it doesn't matter what your
37:56
Speaker 4: political things are, we definitely need kind.
37:58
Speaker 3: Of like difficult leadership that she was prepared to do
38:04
Speaker 3: in this country.
38:05
Speaker 4: You know, in my in my opinion that now you
38:08
Speaker 4: people that kind of don't mind being unpopular basically for
38:11
Speaker 4: their for what they really believe in and have beliefs.
38:15
Speaker 2: Brilliant recommendation. Thank you very much. Thank you, thanks for
38:24
Speaker 2: listening to this week's Marion Talks Money. If you like
38:26
Speaker 2: our show, rate review, and subscribe wherever you listen to podcasts,
38:29
Speaker 2: and keep sending questions or comments to Merorn Money at
38:31
Speaker 2: Bloomberg dot net. You can also follow me and John
38:33
Speaker 2: on Twitter. All exam at Marinus w and John is
38:36
Speaker 2: John Underscore Steppe. This episode was hosted by me Maren
38:40
Speaker 2: Zumbset Web. It was produced by Summersaudi and Moses and
38:43
Speaker 2: sound designed by Black Maples and Kelly Garry. Special thanks
38:46
Speaker 2: to Richard's dably