Two top UK small-cap trusts
Odyssean and Rockwood Strategic apply a private-equity approach to public markets
It has been five years since Stuart Widdowson and Ed Wielechowski launched Odyssean Investment Trust, backed by Christopher Mills’ Harwood Capital, and a year since Richard Staveley moved what is now Rockwood Strategic there. Despite very difficult market conditions for UK equities and especially for smaller companies, the results have been outstanding.
Since its inception, Odyssean has returned 10.7% per annum against just 0.9% for the broader Numis smaller companies index, while Rockwood returned 21.4% in the year to the end of March against a benchmark index return of -15.7%. Rockwood, with £51m of assets, now trades on a discount to net asset value (NAV) of just 2% while Odyssean, with £184m of assets, trades on a small premium.
Odyssean has had “a frustrating start to 2023” thanks to a profit warning from NCC, one of its largest holdings. This was ascribed to a sudden deterioration in NCC’s US business, which is dependent on orders from large US tech companies. The share price dropped to 98p but Widdowson believes that 155p-200p can be achieved in three years on conservative valuation assumptions, so the holding was increased. It now makes up 7% of the portfolio.
The private-equity approach of both trusts implies concentrated portfolios. Odyssean has 15-25 investments, with the ten largest accounting for 77% of the portfolio, while Rockwood has 18 holdings, with the top ten accounting for 64%. Odyssean has just 0.4% in cash, “which is indicative of the number of opportunities we see”, while Rockwood has 21%, following the takeover of Crestchic for 4.8 times the money invested.
Exciting potential
Odyssean’s largest holdings are speciality-chemicals company Elementis (13%), which supplies the personal care market as well as industry, business-to business media and data company Ascential, (12%) and inkjet printer-heads manufacturer Xaar (11%).
The break-up value of Ascential, a conglomerate, “significantly exceeds the share price” while “we are most excited about the potential for the new products” being launched at Xaar.
UK exposure by sales is under 25% of the total. “These are global businesses that happen to be headquartered in the UK.” As global businesses, they are more likely to be attractive to global buyers. Odyssean has seen ten holdings taken over since its launch. “This is a portfolio of undervalued special situations with opportunities to drive valuations regardless of the broader market.”
As a smaller trust, Rockwood tends to invest in businesses with market values typically below £100m, while Odyssean’s portfolio companies are larger. “This is a structurally inefficient part of the UK market with perhaps 500 investable companies,” says Staveley.
“We look for hidden gems, fallen angels, companies that have lost their way and family-controlled companies facing generational change.”
The focus is on value and recovery but “we seek catalysts for change”. As at Odyssean, Staveley seeks to “engage with management rather than use a hardened (ie, hostile) activist approach”. He also seeks “significant scope for profit growth due to self-help, regardless of the economic background”. The top holding is education-services group RM, once a high-flyer but abandoned by investors after a botched expansion into IT services caused financial problems. The market value has fallen from £200m to around £25m, where Staveley has been buying. He remains enthusiastic about media groups Centaur (“huge upside”) and M&C Saatchi (“a very good business”).
“It is difficult to understate how unloved UK equities are,” says Widdowson. “£1.3bn was redeemed from UK small and mid caps last year, 8% of starting assets under management. Flows this year are just as bad”, but “UK equity valuations are unbelievably cheap at a significant discount to historic averages... while merger and acquisition activity continues”. When sentiment finally changes, “the snap-back will be material”. Odyssean and Rockwood, the top small-cap performers in tough times, should continue to lead the field.