Yahoo Finance Questor: Back the British underdogs with these lucrative funds
“Micro-cap” funds investing in the smallest UK-listed companies now look attractive as Britain’s stock market comes in from the cold in anticipation of a cut in interest rates.
Excluding two small funds, one of which is being wound up, there are four London-listed investment companies focusing on undervalued shares at the lower end of the stock market.
Of these, two deserve attention after financial publisher Citywire highlighted the good performance of their fund managers.
Ken Wotton, manager of Strategic Equity Capital at Gresham House, and Richard Staveley, manager of Rockwood Strategic at Harwood Capital, have both gained high “AA” grades in the new Citywire Investment Trust Fund Manager Ratings.
Citywire analyses the three-year returns of investment company managers investing in shares, or equities. Every month it ranks their performance against a relevant stock market benchmark in terms of how much return they make for the risk they take.
Of those whose risk-adjusted returns beat their benchmark index, the top 10pc receive the highest “AAA” rating, the next 20pc an “AA”, the 30pc below that an “A” and the remainder a “+” rating. In all, 51 portfolio managers running a wide range of 33 investment companies have been rated.
The ratings come at a fruitful time for Wotton and Staveley’s approach to running portfolios of 15 to 25 UK stocks under £300m. Both target fundamentally sound businesses trading below what they believe is their true value and whose management are willing to work with them on a five-year recovery plan to double the shares.
Rockwood Strategic, a small but rapidly growing £79m investment company, has jumped 23pc in the past three months helped by a new investment in Funding Circle.
Shares in the loss-making lending platform have more than doubled since Staveley bought them in February and the company responded to his call to cut costs and do something with its cash pile.
A big share buyback and the likely sale of its US operation quickly made Funding Circle Rockwood’s fourth biggest holding at 6.8pc of assets.
Filtronic, a Leeds-based engineer that is now Rockwood’s fifth biggest position at 6.7pc, soared 164pc after winning a new contract with Elon Musk’s SpaceX.
Since April 2022 when Staveley was reunited with the trust, which he previously ran when it was called Gresham House Strategic, its shares have rocketed 82pc to 257.6p.
It got a massive boost that year when Crestchic, a manufacturer of power transformers in which a third of its assets were invested, received a £122m cash bid.
Mergers and acquisitions have continued to benefit the fund with property website OnTheMarket, City Pubs and Finsbury Foods all falling to predators last year.
It’s a similar story at the £174m Strategic Equity Capital which Wotton has run since September 2020. Although returns have been less spectacular, at 364p the shares are up 20pc since we tipped them at 302.5p in June 2021.
Early last year it enjoyed a windfall as its second largest holding, X-ray provider Medica, accepted a £269m cash bid from a private equity bidder at a 32.5pc premium.
The previous year Wotton saw pharmaceutical company Clinigen, registrar Equiniti and software provider Proactis all fall to private equity buyers.
After UK inflation this week fell closer to the Bank of England’s 2pc target, both fund managers hope interest rate cuts will soon follow. History suggests smaller company shares could rally after six years of being buffeted by economic fears and ignored by investors.
“When rates start tickling down that will start a period of decent performance,” said Staveley.
Wotton, whose investments are valued at 8.5 times profits compared to 11 to 12 times a few years ago, believed small-cap stocks could bounce back quickly.
“When small caps recover, they significantly outperform and by a greater amount than they underperformed on the way down.”
Questor believes both investment trusts are worth backing as is Odyssean, also part of Harwood Capital, which at £207m is the largest fund fishing in micro-caps.
Its shares, up just 8pc since we tipped them in June 2022, spiked this week on a bid for XP Power, the electronic components manufacturer in which it is 9pc invested.
With their stock picking proven and the sector returning to favour, this is the time to ‘hold’ Strategic Equity Capital trading 6pc below net asset value and Odyssean on a small 2pc premium above NAV. To these we add Rockwood Strategic which charges 1pc a year and a 10pc performance fee of gains over 6pc, a price worth paying to gain access to a neglected corner of the UK market.
Questor says: buy
Ticker: RKW
Share price: 267p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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