Merryn Talks Money

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

Host: Merryn Somerset Webb (Bloomberg)
Guest: Richard Staveley, Manager of Rockwood Strategic Investment Trust
Date: November 12, 2025

Episode Overview

In this episode, Merryn Somerset Webb dives into the current state and future potential of the UK small-cap market with Richard Staveley, the fund manager behind the standout Rockwood Strategic Investment Trust. They discuss the prolonged slump in small-caps, the unique features of the Rockwood approach that have delivered exceptional outperformance, the broader market influences suppressing UK smaller companies, and the possible catalysts for a resurgence. The conversation blends history, practical investment wisdom, portfolio insights, and speculation on regulatory and structural changes that could unlock value.

Key Discussion Points & Insights

1. The Malaise—and History—of the UK Small-Cap Market

[01:55–06:47]

• The UK small-cap sector has suffered a prolonged downturn; AIM is down 37% over four years, FTSE Small also negative ([03:13]).
• Historically, small-caps outperform over nearly any normal investment horizon (since 1955), running counter to current sentiment.
• The recurring market cycle: capital chases large caps in hot sectors, leading to bubbles and crashes, leaving small caps neglected and undervalued.

“UK small caps… have a long-term record of outperforming… and at the moment, they are extremely inexpensive. Still, they’re described as one of the most unloved sectors in the world.”
— Merryn Somerset Webb ([01:55])

“This has kind of been a very strange phase… of underperformance. And at the moment there is basically very little profitability being projected for UK smaller companies. No one likes them… Many are unloved, but their balance sheets are actually very, very strong.”
— Richard Staveley ([04:20])

2. Why Investors Shun UK Small Caps

[06:47–10:47]

• Liquidity: Increasing fund size constrains the ability to invest in illiquid small-caps.
• Passives vs. Private Equity: Passive investing does not benefit UK small caps much, but the migration of capital to private equity definitely reduces flows to public small-caps.
• Structural Bias: Larger UK small-cap funds invest in bigger “small” companies, further sidelining genuine micro-caps.

“Liquidity is definitely the case now… when you come out of more difficult periods, it’s pretty fast. When small cap gets moving… you’ll never get in quick enough.”
— Richard Staveley ([07:12])

3. The Rockwood Difference: Approach & Outperformance

[10:47–18:49]

• No benchmark obsession: Rockwood targets stocks that can double in 3-5 years (seeking 15% p.a. returns) ([11:29]).
• Concentration: ~62% of capital in top 10 holdings out of just 25 total—allows for deep due diligence and high conviction ([13:37]).
• True micro-cap focus: Only invests in companies below £250 million market cap.
• Permanent capital structure: Not forced to sell due to redemptions, unlike open-ended funds.
• Value bias: Looks for companies trading below book value, often where others see only problems.
• Constructive activism: Takes significant stakes, actively engages with management/boards to create or unlock value—without public agitation when possible.

“We don’t have a benchmark. We don’t care. We don’t get paid relative to a benchmark… We target stocks specifically that we think can double in value over three to five years.”
— Richard Staveley ([11:33])

“Half the portfolio in Rockwood is trading on a discount to book value. Which Warren Buffett gave up on about 30 years ago because there weren’t enough stocks trading at a discount to book value for him to buy. But you can buy quite a few stocks these days.”
— Richard Staveley ([18:27])

4. Defining Value Investing at Rockwood

[17:06–18:49]

• Reluctant to use long-term DCFs (discounted cash flow); instead focuses on realistic near-term cash flow and tangible asset value.
• Currently able to buy companies below book value, which is rare in modern markets.

“We think that DCFs are very dangerous, but… a business is worth its future free cash flows discounted back to today… We focused on the free cash flow generating ability in the next few years, often when it’s not generating free cash flow and is valued as if it doesn’t generate any.”
— Richard Staveley ([17:35])

5. Activism & Constructive Engagement

[18:49–23:09]

• Rockwood doesn’t just wait for the market to re-rate undervalued companies but actively works with management and other shareholders to affect change.
• Prefers to keep its activism “quiet for as absolutely long as possible.”
• Several case studies: Funding Circle, Capita, Trifast, and Vanquis Banking—all demonstrate how engagement improved outcomes.

“We call it constructive engagement… we build up stakes and then work out what needs to change or evolve… and then we will reach out to other stakeholders… catalyze stuff to happen.”
— Richard Staveley ([18:49])

6. Portfolio Themes, Big Winners & Current Holdings

[25:15–32:28]

• Avoids top-down thematic investing: “Themes are for dreams.”
• Returns are driven by a handful of multi-bagger stocks (e.g., Filtronic—where Rockwood bought stake before Elon Musk).
• Other big/current positions:
  • RM plc (Education): Active transformation with significant board influence.
  • Capita: Once a FTSE 100, now a recovery/AI story; undervalued, post-restructuring.
• Rockwood often has board representation in its portfolio companies (10 of 25 holdings).

“Themes are for dreams… humans love a good story, but it simplifies much more complicated matters.”
— Richard Staveley ([25:27])

7. M&A, Market Shrinkage, and (Potential) Revival in IPOs

[32:28–36:58]

• UK market has seen many companies leave via M&A/private equity, with few new IPOs entering.
• Some IPO signs of life, but Rockwood avoids IPOs (“They never choose to list at the bottom…”).
• Institutional and regulatory support could catalyze a turnaround (e.g., pension fund allocation, ISA rule changes).
• Valuations are low, sellers exhausted; set-up is there for a rally if momentum picks up—with the right government action.

“The overall situation… it is a bit like the ingredients of the cake are all there now… House of Commons pension scheme has 1.5% in UK equities… the sellers are kind of gone… The performance has been terrible, which is a good ingredient… valuations are attractive, leverage is now low…”
— Richard Staveley ([35:01])

“All we now need is for Rachel Reeves to sort of turn the oven on, basically, with a bit of government help, and then we're off.”
— Richard Staveley ([36:57])

8. The Power of Value + Momentum and Learning from Experience

[39:13–40:36]

• The holy grail: Buy cheap (value), sell dear, but let winners run (momentum).
• Many value investors sell too soon; running winners has greatly aided Rockwood’s performance.

“I wish I'd learned it earlier, but if your DNA is value, you always sell your stocks too early and don't…running your winners is something I learned about halfway through my career and that's definitely helped me get a bit better.”
— Richard Staveley ([39:19])

Notable Quotes & Memorable Moments

• On the cycle of market enthusiasm:
  “Elephants don’t gallop. If you want to make real money, you need to be in small caps… But if you told a young investor today… they look at you like you’re the crazy one.”
  — Merryn Somerset Webb ([04:02])

• On liquidity causing professional fund herd behavior:
  “As the funds become bigger… they find it difficult to allocate to smaller markets… liquidity is definitely one of the reasons so far.”
  — Richard Staveley ([07:12])

• On engagement style:
  “We do try our best to do it without giving lots of public arguments, so we keep our arguments quiet for as long as possible.”
  — Richard Staveley ([22:31])

• On ingredients for small-cap revival:
  “All the ingredients are there… sellers are gone, valuations are attractive, leverage is low, expectations low. All we need is a bit of government help—and then we’re off.”
  — Richard Staveley ([35:57])

Key Timestamps & Segments

• 01:55 — Introduction to the UK small-cap market’s slump
• 03:13 — Historical outperformance vs. recent struggle
• 06:47 — Why small-caps are out of favour (liquidity, market changes)
• 10:47 — Rockwood’s unique investment process and performance
• 14:19 — How Rockwood’s focus brings information advantage
• 17:06 — What “value investing” means at Rockwood today
• 18:49 — Rockwood’s approach to activism and constructive engagement
• 25:27 — Discussion of themes, winners, and portfolio examples (Filtronic, RM, Capita)
• 32:28 — M&A trends, IPO desert, structural changes needed for revival
• 35:57 — List of “ingredients” for a turnaround in UK small caps
• 39:13 — Importance of combining value and momentum in investing

Final Notes — Book Recommendations

• On Richard’s reading list:
  • P.G. Wodehouse (“great writing, very calming”) ([40:45])
  • Andrew Ross Sorkin’s new book on the 1929 Crash
  • Charles Moore’s biography of Margaret Thatcher (“we definitely need… leadership that she was prepared to do”) ([41:42])

For those seeking deep insight into why UK small-caps are unloved, why that could shift quickly, and how a niche fund has dramatically outperformed by acting differently, this episode is a must-listen. Richard Staveley’s blend of candour, detail, and colorful market history makes for an engaging and highly actionable conversation.