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Buying the Great British boot sale [Members]
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Superb. Thank @TI. Well worth the wait and more. 🙂
I was looking at RKW in a spare moment only yesterday afternoon and posted the link to the Kepler Trusts Intelligence article (of 4 June 24, titled “Investing in UK micro-caps with investment trusts”) in my comment #34 yesterday at the end of the thread on last month’s Monevator Mogul piece.
Here’s the relevant bit, which got me interested in RKW (right towards the end of the Kepler piece):
“Many of these managers have extensive expertise and experience of investing in micro-caps. By way of example, the manager of Rockwood Strategic (RKW) has over 20 years of experience in UK small-cap equities and takes an active private equity style approach to investing in micro-caps. Rockwood carries out extensive due diligence and engagement with key stakeholders prior to investment. Its concentrated portfolio of around 20 companies allows active engagement on an ongoing basis, and the manager works closely with management teams to identify the key catalysts to unlock shareholder value.”
I then looked up RKW on HL and saw the premium to NAV and, I must admit, that it did immediately put me off somewhat. But now I wonder if that first reaction was a mistake.
Thank you again for this excellent and thought provoking second part to this Moguls’ deep dive into the UK shares and Investment Trusts space.
The only three points which I can immediately think to make here are I agree the value and opportunity are in the UK mid and small caps; I also think UK micro and nano caps are worth looking at; and that the UK market has the significant advantage of availability in practice to UK investors; e.g. it’s not a situation like finding I’m trying (sadly unsuccessfully) to persuade HL to list a US returned stacked ETF or an unlisted AQR trend following fund. These UK ITs are actually there to be brought (assuming, of course, that they’ve not fallen victim to recently misapplied consumer duty, value for money over diligence/reviews by the fund platforms).
Thanks. Interesting.
I’m still avoiding the UK except as part of a world index tracker ETF.
Your comment ‘Political risk … I don’t think things could realistically go much worse for UK shares than the past eight years’ has tickled my interest though
I’ve been loading up on UK shares and UK investment trusts since the start of the year and I am now fairly overweight UK. Same motivation as you, hoping for a re-rating. Of the Harwood stable that you focus on in this piece, I own Odyssean (OIT) only, although I do view it as slightly less affiliated with Christopher Mills than the others. I bought it for similar reasons to the ones that you’ve mentioned – I wanted to own pure UK small caps in a fairly concentrated fund (I don’t buy funds/trusts with a large number of holdings) and none of the holdings in the OIT top ten are stocks that I own or would buy myself. Therefore it complements my stock holdings. Also it doesn’t pay a dividend, which is preferable for me as an overseas investor. Now I’m waiting and hoping for some upward action…but might be tempted to buy more if it trades sideways for a while yet.
NB: North Atlantic Smaller Companies IT is the fourth largest equity/fund holding (and the largest non-ETF equity holding) in Capital Gearing Trust (with £15,981,000 of NAS held by CGT on 31/3/24 – per CGT’s Annual Report and Financial Statements).
As always a fantastic write up @TI, despite being a passive zealot, I have been loading up on investment trusts over the last 12 months and Rockwood will be added to the portfolio.
Best one yet. And that’s saying something.
Yes, Odyssean history is fairly impressive – from Stuart Widdowson’s decent length track record at his previous place, to the fact that Odyssean was set up very much how he wanted it with a crack team – Mills aside, the Chair is Widdowson’s old boss (I think?) and was head of HgCapital, which is a pretty decent CV.
But yes generally the Harwood stable overall are pretty blue-chip for UK small-caps. And most of the other giants of that space have retired now e.g. Harry Nimmo and Simon Knott.
I don’t think I read your PE feature, but there is a slight irony on the Armitage angle in that over e.g. 5 years, you’d have been better off with HGT IT than most of the Harwood stable. But they’re probably pretty complementary.
Thanks for the thoughts all, and the nice words are nice to hear after 4,500 words of course. Only human! 😉
Re: Odyssean, yes I agree it does seem arms-length Harwood. It’s actually quite difficult to find any reference to Hardwood in its site/literature (I think they share the same Mayfair address from memory, as one of the only clues) but Harwood does include Odyssean in its own literature. So perhaps it was an agreed part of the set-up for Stuart W to be seen (/to be) his own man(ager).
There’s definitely a danger it’s the fund house of the moment, and as I say in the piece that when a theme (or general re-rating) kicks in they’ll drop down the tables and possibly lag the market (or small cap market).
I suppose though I feel there’s a heads you win, tails you still don’t do too badly quality to this activism/PE specialism in smaller companies, if you can do it right and have the support behind you etc.
Certainly Mills has made a long career out of it over many cycles and hasn’t felt the need to go up the market cap spectrum too far.
@TI: What do you think about other small/micro cap trusts like RMMC? Do you hold this one, for example? I’ve been known to cast admiring glances at RMMC occasionally…but the huge dealing spread has always felt like a glass of cold water to the face. Never been bold enough!
Interesting wider context from @TI in this 2021 MV piece I’ve just remembered:
https://monevator.com/should-you-sell-your-global-tracker-fund-for-uk-shares/
Re: Nimmo’s and Knott’s departures: Giles Hargreaves of Marlborough’s UK Micro-Cap Growth (from 2004) and UK Nano-Cap Growth (from 2013) (and manager of their legendary Special Situations fund from 1998) has also stepped down from all 3 of his roles in Jan. 2021. He managed a 2,549% cumulative return over 22 yrs at Special Situations (besting Woodford’s returns during his 27 Invesco Perpetual yrs (1988-2014), but without blowing anything up, and with min. publicity/fuss).
This value blogger/Substacker today agrees with you @TI; UK plc ‘in play’:
https://open.substack.com/pub/valuesits/p/uk-plc-in-play
I’ve got a little spare cash in SIPP, so I’ve decided to split it across these 4 ITs (RKW, OIG, NAS and OIT) plus AGT, MIGO and one of either the CMPG or CMPI ITs.
If the UK ends up in a Japanese slump with its shares looking promising but the coiled spring of recovery not releasing then so be it. I’ll be barely overweight the UK’s 3.7% global cap weight. But if there’s a pick up and these ITs benefit hopefully the risk to reward is asymmetric.
Time as always will tell.
Not advice. Not recommendation. Always DYOR. YMMV.
@Mirror Man — I do own several other small cap investment trusts at the moment but more as a beta play on UK small caps rather than huge management conviction. That said I bought back into own Aberforth Smaller again (ASL) – very flukily around the lows last year – and I’ve always liked its value approach. (I like the way they look at portfolio level value metrics versus the market in their updates). Of course the market hasn’t liked value much for most of the past few years…
I also still have some Rights and Issues (RIII) but I possibly should have gotten rid of it after the excellent Knott retired. I’m still sentimental after stellar returns from this coming out of the GFC, but that was hugely compounded by the discount closing and a re-org of what had been two classes of shares (income and capital, and maybe prefs too I forget). Knott’s portfolio was a thing of magic, barely changing, Buffett matching or thereabouts.
I do have some other UK small cap ITs but as I say they aren’t really manager plays. And I do chop and change most of my IT positions around quite a bit in probably silly scalping quest. 😉
@Delta Hedge — I’d be surprised if the UK market followed the Japanese market experience, though of course it could rhyme. Our corporate culture is fundamentally different, and besides value is being ‘outed’ week by week through these hostile takeovers — such consolidation is/was harder to affect in Japan. Of course there’s a long-term problem with the short-term boost from takeovers, as we’ve discussed elsewhere, but that’s not really a private investors’ problem as discussed in the article.
Thanks @TI. IC covering NAS today (along with GSCT) in its Global Smaller Cap piece.
Just on Japan, it’s been a turnaround story for so long now that there’s only one of three possibilities
– it has turned around already (with the N-225 finally passing 40k after 35 years in drawdown);
– it really is about to, or in the process of, turning around, and getting back on side return wise; or,
– like nuclear fusion, it is always going to be about to turn around and deliver, but never does.
At least there isn’t a really compelling single reason for its cheapness. Contrast with Korea which sports some of the lowest P/B values in the world for its whole market (Japan may be cheaper for small caps though). In Korea the proliferation of the single family controlled chaebol rivals that of the Japanese zaibatsu at their peak before the Allies ordered them dissolved in 1946. A family can control a massive conglomerate with a tiny shareholding by using holding companies where the family own 51% of holding co A which owns 51% of holding co B which holds 51% of holding co C which owns 51% of the shares in the conglomerate. With a ~6.5% shareholding in the conglomerate the family get 51% of the voting rights to the detriment of outside investors who rightfully apply a massive discount to the shares. It’s that sort of thing to watch out for when looking at discounts and net nets. I recall Ben Graham was staggered at the corporate governance issues when he started looking into net nets after being made a partner at the brokerage Neuburger in 1920, aged just 26.
Would be fascinated to know @TI’s or anyone else’s views on HG Capital, as a UK play. Off top of my head:
Pro:
V impressive long-term performance – has outperformed S&P500 over 5 & 10 years.
V impressive team, perhaps helped by strong foundations at Mercury back in the day.
Con:
Will Labour tax on Carried Interest affect Private Equity?
Given it is Private Equity, is just out-performing SPY (but not quite QQQ) enough? Don’t want to seem greedy, but PE is not without risks, so part of me feels should be compensated more. However, UK assets in past 10 years… pretty impressive.
Discount has come in a lot compared with 2022/3, though arguably rightfully so, given the performance.
Would love to hear any thoughts. Thank you.
@Tom — Just rushing to a train, but I own HGT and have done on and off for years. I think of it as a bit like a European Constellation Software. In fact I almost did it as a Moguls, before the price moved up. Maybe I still will.
It has European exposure though — and new offices in America that will no doubt eat up cash and focus for an uncertain end currently. So I wouldn’t think of it as pure UK at all. Also the discount is hardly at ‘distressed UK asset’ levels anymore IMHO.
Like I say I hold, but for non-UK play reasons. 🙂
RKW results analysed by Kepler Trusts Intelligence on 19 Jun here:
https://www.trustintelligence.co.uk/investor/articles/news-investor-results-analysis-rockwood-strategic-retail-jun-2024
So I finally bit the bullet and got some shares in Rockwood stablemate Oryx International Growth fund (/trust) today. The quoted spread was truly outrageous as usual — something like 6%! But I was able to deal well within that, albeit still booking an instant 2.5% or so loss on my spreadsheet.
It’s like the old upfront loading fee on unit trusts from the ancient times!
The discount to NAV is around 30%, give or take. Despite the name the trust is overwhelmingly invested in UK small caps, with C Mills leading the team here. I wanted yet more UK exposure post the Labour win, and I’m hoping (we’ll see) that the titchy end of the market might be a little less exposed to strengthening pound compared to FTSE 100 stuffed trusts on a discount.
Oryx recently posted full year results, and they make decent reading:
https://d2ysp6t8sg26jc.cloudfront.net/2024-07-04/0591V/87b5960dac66133dab1a30d5a88e839157bef951.html
The NAV is up 891% over the past 15 years. To say I’d be happy with that again is Our Legendary British Understatement in action… 😉
Odyssean has raised £11.4 mn in a share placing for investments into UK smaller companies. Stuart Widdowson and Ed Wielechowski fell short of the maximum £29 mn which they could have raised, as the board was permitted to issue up to 20% of capital in each financial year. It has now issued 6.5 million shares at a 1% premium of 174p after raising the money from institutional and retail investors.
@Delta Hedge — It is interesting to see Odyssean issuing shares at a premium while Oryx (which I own) languishes on a huge discount. I appreciate of course that while they’re from the same stable (/’school’) they are different vehicles with different managers, but discounts/premiums are so often about broad perception/demand.
Over the past year Oryx is actually ahead on NAV gain so there’s not even short-termism to point the finger at here. More and more I feel discounts/premiums can have a self-reinforcing momentum to them. (See also RIT Capital) and that investors get a *somewhat* arbitrary ‘sticker price’ for what the correct level of discount is.
Of course this can and does change over time (See LTI, the infrastructure trusts etc) and can be an opportunity (/risk factor).
Of course Odyssean is the one Harwood vehicle I have no stake in, so ‘I would say that wouldn’t I?’ 😉
I’m guessing (and noone can know, of course) that for unlisted assets the level of discounts or premia largely reflects how much Mr Market believes NAV.
Contrastingly, for things like PSH, where the assets are basically liquid and traded in real time, maybe its down to fees and inaccessibility to US investors.
For the unlisted/illiquid: at an extreme social housing ITs on 70% discounts and whatnot must show a profound lack of investor trust in ‘the numbers’.
Even poor old Schroders, who’ve made massive efforts to clean up the portfolio and improve transparency post-Woodford, can’t turn the ship around for INOV on investor trust when that IT sits on an 11 p price -v- a 23 p NAV (compared to a 120 p price and a 100 p NAV at the WPCT launch).
RIT’s my biggest % losing position presently. Thank God I sized it as a 1 percenter. Position sizing is as important as selection IMO. But I still somehow managed to buy that one at not so far off the ATH. I still like the Rothschilds’ approach and its super long term performance; but the discount seems stuck like 2022 never ended.
RKW (amongst others) also now tipped here following the market wobble at the start of last week (which briefly put RKW into correction territory from its year peak price of 281p down to around 250p on Tuesday, before recovering somewhat to 265p on Friday):
https://www.trustintelligence.co.uk/investor/articles/opinion-investor-don-t-tell-em-your-name-pike-aug-2024
Interesting take here on the Buy British theme with ITs, with the bonus of a nice short argument interlaced of what active v passive actually means:
https://www.trustintelligence.co.uk/investor/articles/strategy-investor-buy-british-retail-aug-2024
To quote: “the theoretical justification of the benchmark-focused approach has to be based on some form of the Efficient Markets Hypothesis..which holds that active management is self-defeating as equity market prices are the best possible estimate of the current value of a security…. But there is a pretty major problem with this hypothesis. The EMH holds that market prices are informed by all public information, because market participants have considered and weighed that information in order to decide whether to buy or sell. But when participants are investing passively, they are only investing in certain companies or countries because of their weights in market cap indices, and so this is false: prices do not reflect information but the influence of flows. (By this logic, the more success the advocates of passive strategies have, the more the intellectual justification for passive approaches is disproved.)”
Rockwood previewed here today by Kepler Trust Intelligence:
https://www.trustintelligence.co.uk/investor/articles/fund-research-investor-rockwood-strategic-retail-sep-2024
@Mirror Man #9, @TI #12: re UK Small Cap trusts: Kepler Trusts Intelligence this week: “Despite the recent uptick, UK small-cap valuations remain well below long-term averages and other developed market indices……the UK is currently trading at the lowest valuation of all developed market indices, including a 24% and 36% discount to the MSCI World and US Small-Cap indices respectively”. Currently have a very small (<1%) holding in Aberforth and now also looking at BRSC and JPM UK Small Cap Growth & Income.