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

Summary

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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

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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.

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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])

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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])

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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

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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])

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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.

Transcript

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[Merryn Somerset Webb]

Welcome to Maren Talks Money, the podcast in which people who know the markets explain the markets. I'm Merryn Somerset Web and and in this episode we are going to focus on UK smaller companies. Now, any regular listener to this show will know that John and I often talk about why you should be invested in smaller companies. They have a long term record of outperforming at the moment, particularly in the uk they are extremely inexpensive. There's a lot of potential there for mean reversion and quite a lot of growth that we are simply not showing enough interest in. Small caps despite all these things are still described in the UK as one of the most unloved sectors in the world. Why is that? What's going on? When might it change? We have got the perfect guest with us to discuss that. It is Richard Staveley, manager of the Rockwood Strategic Investment Trust, which focuses entirely on very small companies in the uk. Richard, welcome to Marin Talks Money.

[Richard Staveley]

Thank you very much Maren. Great to be speaking to you.

[Merryn Somerset Webb]

Okay, now Richard, there's a lot to go through here, but I want to start not by talking about your amazing performance because your trust performance in this market has been really fairly spectacular, but talking briefly to set the scene about the UK small cap market in general. It's been awful, hasn't it?

[Richard Staveley]

Yeah, it's been really bad. I think the aim market's down 37% in the last four years to the end of September. And FTSE small, not quite as bad, but it's a bit of a rubbish index now and he has about 100 companies in. That's still negative over four years. So it has been really, really difficult, period. The interesting point obviously, and it's been made for some time by UK smaller companies managers is actually the longer term record going back to 1955 over pretty much any reasonable time horizon, or at least someone's normal time horizon shows that UK small caps basically and indeed small companies over across the world outperform their larger companies. So this has kind of been a very strange phase or elongated phase of underperformance.

[Merryn Somerset Webb]

Yeah, I mean it's interesting, it goes right back, you'll remember the old Jim Slater phrase, elephants don't gallop. Right. If you want to make the real money, you need to be in small caps. But if you told that to a young investor today, that historically small caps have outperformed larger companies, they look at you like you're the crazy one because they have no experience of this.

[Richard Staveley]

Yeah, I think that's true. But I think what I would say to that younger investor or maybe someone who hasn't invested much or not done much of their stock market history is actually the worst points to invest are often in the peaks of market phases when the largest companies become the epitome of those phases. If I think through my career I started, I became a fund manager and an investor in 1999 right at the peak of the TMT bubble. And obviously both the Internet and mobile phones have become ubiquitous, were becoming ubiquitous at that point. A great development for humanity. But a huge amount of capital was basically spent which everyone thought all the companies that invested it were going to make a huge fortune from and many of them didn't. And brands like Nokia don't even exist anymore. But they were the biggest companies. You wheel forward through to the mining cycle and what happens there? Everyone ends up investing in Glencore and Rio Tinto because China's joining the world economy and obviously that overall actually has been good for the overall amount of economic activity in the world. And again, Anglo Americans buying copper mines at the top in Brazil and having to write off billions, billions later you will fall through to the financial crisis. And what happens there? There's huge amounts of financial. Well, alchemy is probably the wrong word for it, but let's say innovation. Shenanigans, Shenanigans, shenanigans, but innovation as well. And I think that's the point. There was a lot of innovation about how to say, segment risk and do different types of lending and make more products available to other people. And again, which in the run up to the crisis, the bank shares have been extremely strong. Huge multiples of book, there's huge amounts of sucking of capital. And that's kind of what's happening now, clearly in America, with huge concentration into stocks that are investing huge amounts into AI and are now being valued on very high multiples of future projected profitability. That is not the case with UK smaller companies at the moment. There is basically very little profitability being projected for UK smaller companies. No one likes them. Their balance sheets are actually very, very strong. They cover a range of industries. Many of them touch all kinds of countries and economies around the world, all types of sectors, but definitely not an area where there's huge amounts of capital being sucked into at all.

[Merryn Somerset Webb]

What's pushed them so far out of fashion? I mean, if we look at the large caps in the UK, the FTSE 100 has had an astounding run, really. And we keep looking at 10,000 and thinking not long to go now. Not long to go. No. In fact, by the time this pot is out, we may have passed 10,000. So large caps have been very popular this year. But smaller companies, not so much. What makes smaller companies so particularly unattractive to domestic and to international investors?

[Richard Staveley]

I think there's two aspects to it. And first, you're absolutely right. FTSE 100 up in $ terms significantly more than the S and P this year versus the median S and P significantly more. I mean, it's the S and P being driven again by those large caps. I think the main issue is liquidity and just the normal flow of time. So typically when there's a proper cycle going large does go first and then as those stocks sort of re rate, money starts to trickle down, more money kind of comes, it comes into that market. But I do think a concern about liquidity is definitely the case now. One of the reasons why Rockwood has been doing better than everyone else basically in the last two, three years is quite a lot of the money, even in UK small companies, is now concentrated in some very large firms. And I think many of your listeners, maybe, maybe they use a wealth manager and they probably know that their wealth managers merged with another one and they become bigger. And as a result the funds, as these funds become bigger and the money's more concentrated, they find it difficult to allocate to smaller markets and indeed smaller funds generally, in fact, which Brockville is one. So that liquidity aspect is definitely one of the reasons so far. But as we've seen from all kinds of stuff, gold isn't particularly. I can do synthetics and I know you're a bit of a gold bug, but there are lots of other illiquid markets which in the end catch a bid and start moving. And when they do, because it's tighter, it tends to be pretty dramatic. And one of the things that I've again experienced during my career, when you come out of more difficult periods, it's pretty fast. When small cap gets moving, you sort of got to take some of the pain in advance before it really moves, because you'll never get it in quick enough. You'll be going, oh, it'll come back tomorrow, or to come back tomorrow. Before you know it. You know, AIM or the FTSE Spalds done already had a really strong period.

[Merryn Somerset Webb]

Is it also connected to two other things at different ends of the spectrum? One being the rise of passive investing, which tends to automatically shovel flows into the larger companies rather than the smaller. And the other being the rise of private equity, which means that money that might previously have gone into listed smaller companies or pushed companies towards IPO stays in the private market. So. So you've got two ends there which make a difference to the liquidity and hence the performance of smaller companies.

[Richard Staveley]

I think the second, the private equity piece is definitely the case and we know with pension fund allocations, UK overall itself has massively reduced over the last 15, 20 years. And within that, as a result, small will as well. The passive piece I'm not quite as sure about because it's all sort of in proportion. So we were delighted. Earlier this year, Rockford joined the FTSE All Share Index and FTSE Smallcast and as a result we've now got a few passive guys have bought some Rockford shares and are benefiting from it. So I'm not so sure. Passive. I think what the passive piece does, it helps active managers which dominate UK small companies. There are no index trackers for the AIM index or the FTSE small index. I think the passives make active investment easier, but they may make it Slower for the kind of intrinsic value to come out, because the passive money's dumb, if you see what I mean. The proportion of passive money, it doesn't catalyze a change or unlock value in itself. Very different to how Rockwood, for instance, approaches things.

[Merryn Somerset Webb]

Okay, so that sets up the general misery in the market. And now if we look at your own performance, it's something completely different. I mean, I'm looking at your fact sheet from 30th of September, so a bit out of date, but this is the end of the year of the third quarter only for comparison purposes. So if you look back over 36 months, you're on total shareholder return of 99.7%, net asset value return 93.9%. Whereas the FTSE Small, not including other investment trusts, is 31% and the AIM All Share is minus 3%. So you've outperformed everyone else hugely. Let's talk about the factors that made that possible.

[Richard Staveley]

Okay, well, that's very kind. Yeah. So there's some different aspects.

[Merryn Somerset Webb]

We are not kind on this podcast. This is not kind. It's just numbers.

[Richard Staveley]

No, no, it's kind of good to mention the performance, put it that way, because I don't like talking about it myself. So it's very kind of. Yeah. So it's basically because we're taking a differentiated approach and the aspects that are different are pretty simple. Firstly, we don't have a benchmark. We ask. We don't look at the bench, any of the possible benchmarks. We don't care. We don't get paid relative to a benchmark. And benchmarks do drive quite a lot of professional fund manager behavior. What we do is we target stocks specifically that we think can double in value, go up 100% over three to five years. And actually the returns we've done the last three would suggest, on average they've been three years. And I would suggest just going forward for anyone not to get too overexcited. Five years means you double your money if we do 15% a year. And that's kind of what the target is. The second thing is that we run a very concentrated portfolio, so we have the majority of the capital in the top 10 holdings. It's currently about 62% of the portfolio, slightly less of the quarter end. But we've supported one of our top 10 holdings in our fundraising. So we're up to about 63 and we only have 25 holdings in total most UK Smaller Companies funds. And this is what this quite critical thing, actually. Marin. They basically have because again of their sort of risk departments but linked their OIC funds if you remember, back to what sort of caused Woodford to get unstuck. Well, one of the reasons anyway was that he had open ended daily liquidity funds. And Rockwood is a permanent capital investment trust where the capital stays with us until we lose the contract to run Rockwood. But I can invest knowing I've got that money. Now the managers that have open ended funds, they have their risk department sort of tapping them on the shoulders going oh you've bought this little small cap and do you know with the amount of money we've got it's going to take you nine months to get out of it. If you change your mind, we can't possibly have that because Mrs. Miggins might ask for her money back tomorrow and he won't be able to give it back to her. And actually in some instances those that run our OIK funds also run investment trusts but then choose to run the portfolios almost identically in terms of the names that they own. So they basically transport the liquidity requirements of open ended funds onto investment trusts. So with Rockwood we just don't do that. That means that from a concentration perspective we know real, real bang from our buck. It works both ways. We've got to get it right but when we get it right, you know, it really impacts, it impacts the fund.

[Merryn Somerset Webb]

Okay, and can I just stop you there to stop you there. To say that also means that you have a much wider universe to choose from in that under the dynamics between the OIX and the trust that you've just been talking about other fund managers that means that there's a range of the much smaller and less liquid stocks that they wouldn't invest in at all.

[Richard Staveley]

Correct? That is true. Yeah, that is exactly. Yeah, that is true. Yeah that's right. We actually limit, interestingly we slightly then choose to limit our universe because we found that some of the large, even UK Smaller Companies funds typically don't like investing below 250 million. So for Rockwood we only invest when the company is below 250 million market cap. And some listeners might be quite surprised to hear that in lots of UK smaller companies funds their portfolios invested in multi billion pound companies which doesn't sound very small to, to my mother. Anyway, so we're going right to the small and again we do that because they're the most inefficient. So parts of the markets you have the less professional investors, the least amount of research and your information advantage you can get from extra work can become a lot quicker. Now that's one of the flip sides people don't remember about concentration is that when you've only got 25 holdings and you're looking to replace maybe three or four holdings a year maximum, you've got a lot more time to do the DD on that one stop than you would if you're monitoring 70 or 80 holdings that a larger fund might have. And I think that's been helpful for the amount of due diligence we can do on our holdings to try and improve our overall hit rate. Now there are two other aspects which I think are relevant and one of them has been useful in the last few years, but might not have been quite as useful during the previous 15 since the financial crisis is that we're also unashamedly value investors. And value investing went through a long period of not really working in the due to the sort of extremely low interest rates which undermines value investing. And since interest rates have moved back to their, let's face it, 50 to 100 year norms, a number of fund.

[Merryn Somerset Webb]

Managers have found 5,000 year norms. Really?

[Richard Staveley]

I think, yeah, yeah, there's that great. The Price of Time book by Ed Chancellor. 1 I recommend people read, I mean, brilliant book.

[Merryn Somerset Webb]

We've had him on the pod, Richard. We've had him on the pod. Yeah, you can go listen to that episode straight after.

[Richard Staveley]

Well, as he's probably told you, so we're back to a much more normal and probably sensible rough level of interest rates. Maybe they should be dropping a bit in the UK and I think that's probably likely. But that backdrop is really important for styles of investment and we've had a much more normal playing field for value investing and that's helped the portfolio. And as you might imagine, an index like AIM and small cap gender is probably it's over endowed with growth type investment opportunities versus sort of value investment opportunities. And we are focused on quite a lot of our holdings are recovery situations when we first get involved.

[Merryn Somerset Webb]

Okay, can we interrupt you again? I have to interrupt you again.

[Richard Staveley]

To.

[Merryn Somerset Webb]

Ask you to define value for us in that we hear a lot from people about I'm a value investor, I'm a growth investor, I'm a quality growth investor, et cetera, et cetera. And of course they all overlap and in many ways everyone really means the same thing because anyone who's buying calls themselves a growth investor, they still think they're getting value right or they wouldn't be doing it. So how are you describe, how are you defining Value. And you say you're a value investor.

[Richard Staveley]

Well, we think that DCFs are very dangerous, but that the concept of DCF business is worth its future. Free cash flows discounted back to today is the right way of thinking about value. But we also think it's very, very difficult for investors to have any idea whatsoever is going on a few years hence. So basically we focused on the free cash flow generating ability of a business in the next few years, often when it's not generating free cash flow and valued as if it doesn't generate any or it might even exist. And then we kind of discount back the nearer term free cash flows. And in that regard we also look at real asset value linked to that. So half the portfolio in Rockwood is trading on a discount to book value.

[Merryn Somerset Webb]

Amazing.

[Richard Staveley]

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 on discounts to book value.

[Merryn Somerset Webb]

Okay, that gives a good sense of that. And apologies for interrupting. You can now go back to telling us what you were about to tell us about the different reasons why you think you succeeded.

[Richard Staveley]

So the final piece, I think is really, really critical to why the performance has been, is that we're also active. So we call it constructive engagement. We're not sort of haranguing people most of the time, but we do take stakes, we actually lean into the permanent capital, we build up stakes and then we work out what needs to change or evolve for value to be unlocked or created or recovered. And essentially we then will reach out to other stakeholders. In first instance, is that the management and the board, but regularly to other shareholders who are typically in the sorts of things we invest in, are pretty upset generally and up for it and sort of say, look, we think these sort of changes might be a good idea. What do you think? And they sort of say, well, we agree with A, B and C, we're not quite sure about D. And then we might evolve what we're thinking and then we'll sort of do the quite heavy lifting and sort of agitate to try and catalyze stuff to happen. And that I think in a number of instances has helped generate returns for the fund rather than sort of sitting there and hoping that one day UK small cap goes up, basically.

[Merryn Somerset Webb]

So when the managing director of a listed smaller company in the UK sees you on their share register, do they think this is great? I'm going to get some good advice about how to improve things here or do they have some sleepless nights?

[Richard Staveley]

I think it probably depends on their situation. I know if you rang up a number of our CEOs, for instance, if you rang up Adolfo Hernandez, who's the new CEO of Capita, former FTSE 100 company, but now only listed it valued at about 350 million, we bought it when it got down to 220 million. Or Ian Percival at Trifast, which is a nuts and bolts fast and that's been listed for 20 years. Or Ian McNaught at Vanquist Banking, who's the new CEO of what was formerly called Provident Financial. They would all say it's been a really positive and constructive experience with, with us. I know they do tend to start to think because what happens is it's just normal, why it's repeated. All this is the life cycle that companies go through. So everything's going swimmingly. Let's say the returns are fine, but then you get this period of complacency or they do a rubbish acquisition that they shouldn't really have done. Often with debt, Goldman Sachs would come in and tell them to do something for lots of fees. It's all gone wrong. The returns and profitability collapses and then you get this sort of derating of the shares. Everyone's very upset. The narrative's negative completely. People are kind of know this needs to be changed, but often people just put it off. They don't do it. The CEO might know it's actually not him, it's the finance director that's let him down. Or it may be this obvious. He knows he's for the chop anyway. And really it's an easy conversation and we're just catalyzing what's going to happen and sometimes change like, like that happens. But if you take a good example, Lisa Jacobs, he's a fantastic CEO at Funding Circle, which was listed, actually a good example, listed as an IPO by Goldman Sachs a number of years ago. 1.5 billion pound market cap. We were able to buy that a discount to net cash about a year and a half ago. And we started building our position and we started engaging with them about why they weren't using the excess cash they clearly had to buy back stocks, why the board still had so many people on it even though the market cap come right back down again, why they hadn't done any more significant cost cutting than just sort of tinkering around the edges. And actually it was all very constructive. And before we had to get sort of upset or anything like that, they basically started doing all these things and it's been great for all shareholders essentially. The other thing that's important is we do do we really try our best to do it without sort of giving lots of sort of in the public domain stuff so we keep our arguments quiet for as absolutely long as possible.

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[Merryn Somerset Webb]

Let's talk about the current portfolio. You're clearly fundamental, bottom up, value driven. But do you see any themes emerging in it? When I look at you've got a few defense companies for example in the.

[Richard Staveley]

Top 10 now I think you might answer that question. The thing is because it's fair enough because I have this phrase I made this one up actually. I don't credit myself with many things but I call it themes are for dreams. And this is because themes is because humans love a good story and it kind of simplifies much more complicated matters for them. And so you can almost never really let go of something if it's in a theme. So I think it's quite dangerous. So we think about stuff in kind of life cycles. Now it is true, just to be clear, we've ended up with bits and bobs of defense exposure, but probably not enough to say he's got a big bet on defense. And that's because for instance one of our massive winners we've had is a company called Filtronic. And Filtronic are doing components into SpaceX's Starlink satellite platform. And in fact we still think it's the only share that Elon Musk's bought in the UK which is pretty exciting. We actually bought it at 12p and we bought 5% of the company and Elon bought in at 35p. So we were quite happy about that. If I ever get to meet him we'll have to sort of be smug.

[Merryn Somerset Webb]

Or something like that. So that one bet will have been, has been a big factor in your outperformance.

[Richard Staveley]

That has been a huge, that's been a significant factor. Filtronic's been a massive factor. Funding circle, Galliford, Tri, Restore, now Capita a number but Filtronic's been good. But we've had a number of multibaggers over the years. It's the nature of this kind of a portfolio that its returns are driven by six or seven stocks over any kind of three to five year period.

[Merryn Somerset Webb]

What have you got in the portfolio at the moment that you're most excited about? What's your next 10 bagger?

[Richard Staveley]

10 baggers are impossible to see.

[Merryn Somerset Webb]

All right, fine, fine.

[Richard Staveley]

Okay, okay, okay, okay. So remember like the Target return is 100% over three to five years. Okay so in that regard there's quite a few in the, in the portfolio that we think can do that. One that we've already made a decent return that's got a lot more coming for it is actually the largest holding this company called rm. So RM is an education business, has three divisions and it actually sort of one of its divisions supply schools with curriculum based aids and teaching aids. The second division does technology for schools, outsourced for groups of schools and runs the broadband and the tech tech for the schools. Pretty low margin that business but public sector facing and decent contract. And then the third business is the really exciting business which is a. It does assessment for schools. They have the contracts to mark the exams for international baccalaureate, ICAW counting exams, charter tax exams, Cambridge assessment. They do, they do all these exams and those IB have given them a massive contract as well as Cambridge assessment to digitalize that process over the next few years into a platform which is going to become a very valuable platform that will become very sticky and highly profitable. We've built up a really big stake like 16% of the company. We proposed a director who went onto the board. Oh just to remind you Merritt. So in terms of our active stuff, we've 10 board positions, people we've either proposed or actually we've, you know we've actually got a board seat that's a Rockwood board. Mostly we propose people who then we're comfortable with but we got 10, 10 board seats of the 25 holdings in, in our. We've got a board seat and basically they've announced recently which is what we've been asking for some time to do is they're going to sell off those. The first two divisions I mentioned which will pay down their excess debt that they've got should move the business into a net cash position and then allow the butterfly of this assessment business to sort of emerge. We think the assessment business is worth at least 150 million, probably more in time as it matures and more clients come onto it and that will be quite an exciting. Now that's the kind of stuff that business is valued at 110 million. Most mainstream fund managers won't look at it and we know when they do some of them were like the factors got amounts, decent amount of debt. Since we've, since we've invested in it, we've got a new CEO, new cfo, new head of transformation, new head of hr, new heads of all three divisions and they've announced officially now that those other divisions are non core. So we think. And they're cracking on with it. So we think we'll see Those catalysts during 2026 that should unlock the value in that share in an era period. I also think if I mentioned earlier But I do think it's quite an exciting story and one that many of your listeners think prob probably if they haven't heard of the stock Capita, I'm afraid sadly they may have to use their services in one way or another. The reason I say that is because Capita manages lots of public sector contracts for the government, like all the ones we hate, like the congestion charge and the TV license. And it does a big contract for primary care, gp, back office, what else is it? The student loan company, all these sorts of things. And it was a huge stock Footsie 100 went completely wrong, ended up with far too much debt, real mess, accounting problems, you name it, cyber attacks, basically you couldn't come up with anything else that could have gone wrong. But after quite a period of restructuring and sort of sorting all that mess out, in particular a long disposal program which paid down all the debt, pay down all the pension fund deficit issues that's now emerging and believe it or not, it's becoming almost sort of tentatively, not sure I should use this, this is an acronym, but it's basically becoming AI'd. So you'll understand why I'm tentative about it. Essentially they do a lot of business process outsourcing capital, both the private sector and the public sector. And this is rather than working out. Exactly. This is totally an area where AI is going to have a massive help for how their clients benefit from AI, but also how you deliver on those contracts in a more profitable way. So Capita, we think is going to start generating cash for the first time in years and it probably should be this quarter roughly now, as you move into next year, they should be able to do some further. There's a little bit of final portfolio restructuring. They've got a loss making business they need to exit. It's actually just one contract that needs to go, but it's heavily loss making. And then the public sector division we think will become into full view to mainstream investors. Now that business, actually the public sector which has most of those contracts I mentioned, it has 1.3 billion of sales and makes an 8% margin which it converts about 75% into cash. We think that division alone is worth at least 900 million quid. And actually the debt's down Capita, it's on a p of about 7 or something like that. So that's another one we think could probably double or triple from here if the, the new team there sort of solve it.

[Merryn Somerset Webb]

Okay, interesting, thank you. Can I ask you about M and A, which has been again one of the drivers in this market has been the mergers and acquisitions, companies leaving the market to go private and companies merging. So we've seen a kind of general shrinkage of the number of listed companies, particularly at the lower end. Right. And we haven't seen that pipeline being refilled with new IPOs. Now, we here constantly, every quarter, we are told that the next quarter is going to be the quarter of IPOs. It's all coming back. I wonder how you see that three ways.

[Richard Staveley]

Firstly, actually, this quarter has actually started to pick up genuinely. So last year was the worst year since 1994 or something. There were three IPOs. The first half of this year was actually terrible. I think there's one, but we just had two or three. And there seems to be a view that the market is just gradually opening. Our strategy won't invest in IPOs. We never have, but most people do, so that's fine. And there are lots of ways of having winning portfolios. We just don't like IPOs because basically the time they choose to do it is when they think is the best time to do it, and they're never going to choose it when the valuation's the lowest point in the cycle and they don't have any history of earnings. And that's again, a bit. Bit dangerous. But they're exciting. It's an easy way for the big funds to deploy, get cash into the market because they hate buying things in the market because everyone finds out they're doing it and then pushes the prices up on them. So they prefer to deploy straight into an ipo. So I think that is starting to come back. I think there has been a huge amount of work. It's all quite boring stuff which the general public shouldn't really bore themselves with. But there have been quite a lot of changes and reforms to the listing regime and other bits and bobs that everyone's been working on during this sort of problematic market for the last couple of years, I think are probably just starting to pull together in the ingredients which sort of get people to move. I did see a very interesting piece of research the other day that showed of the. I think of the. I've actually. I wrote it down. I couldn't believe I've written it down. Yeah, here we go. I think of the 14 companies that actually listed in the last couple of years in America that were basically should have been there were sort of British that went to America. Instead of those, only three have gone up, which was aam. Seven have gone down and 10 have.

[Merryn Somerset Webb]

Gone bust because they all listed at Too high a price.

[Richard Staveley]

The ones that's gone to America and just gone for it. We have been a bit through this before in UK small cap in general, in the UK market after the TMT bust, when I first started investing, a sort of fallow period where no one sort of had the, you know, the gumption to get going and then it. Then it picks up relatively quickly. The. The backlog must be big, particularly from private equity that you mentioned earlier that those guys really do need to job on a number of their investments in order to close out their. Their funds. But I was going to just. I would mention, though, this is that, like, the overall situation on the UK and, And the sort of. The situation, it is a bit like the ingredients of the cake are all there now. So the House of Commons pension scheme has 1 1/2% in UK equities. Right. UK equities in general down to like 4% or 3 or 4% rather than 40. The sellers are sort of gone.

[Chase/Advertising Voice]

Yeah.

[Richard Staveley]

Or pretty much gone.

[Merryn Somerset Webb]

Yeah.

[Richard Staveley]

The performance has been terrible, which is a good starting. That's a good ingredient. Performance having been terrible rather than being great. The valuations are attractive. Yeah. The leverage is now low, definitely, in corporate and also actually UK consumers, balance sheets are in good position and expectations are relatively low. Private equity and trade buyers are, as you've just said, kind of highlighting that there's value here. Interest rates probably are gradually falling. Obviously, inflation's been a bit sticky, but we can all speculate that I suspect this budget might help inflation fall rather than accelerate inflation, be my guess. That said, with public sector wages running at 5.7% this year, I mean, that's not very helpful to get your interest rates down. Government needs to really think carefully about that. So every bond's kind of there, all the ingredients are there and 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.

[Merryn Somerset Webb]

And how do you expect her to do that? By changes to the ISA rules or shifts in the percentage that pension funds have to keep in UK equities?

[Richard Staveley]

Well, if she's really bold and she wants to be remembered, because she may think that whatever I do, I think.

[Merryn Somerset Webb]

She'S going to be remembered. I think she's going to be remembered.

[Richard Staveley]

Yeah. But if she wants to remember any, if she's got anything to say, she did positively afterwards. And if she thinks that, like, basically this is the last role for her, maybe could be her last budget, even if it's the right budget. If you see what I mean.

[Merryn Somerset Webb]

Yeah.

[Richard Staveley]

Then a good thing to be remembered would be decent UK equities positive measures. Obviously, the ISA measure is basically neutral, so it's a tax neutral measure, so the treasury can't complain about it. You just say, look, look, if you want any future tax breaks for ISAs, it's got to be invested in the UK and UK focused Investment Trust and UK stock market. On the pensions, I think it's harder, but I think it's still, if you really wanted to go for it, they've leaked this sort of potential policy of saying on DC defaults that in the first instance, DC defaults have to have 25% and then you can opt out. The reason why they do that is apparently the stats are 99% of people fill in their pension fund forms less than 20 seconds and just do so. You'd probably end up with quite a lot ending up going in. But the key here, I think the point is, it's about if we think about where the US market is now and how it's got to where it is over the last period and why the UK is where it is now, and the thinking of people that are investing now, they are investing in the US because it's been performing well, they don't really care about the valuation. They bought into the story, but it's really the momentum that's key. All we need to do is start that momentum. And actually, as you mentioned earlier, FTSE 100 has already started a bit. Just start a bit of momentum and the rest will just sort itself out. I actually literally believe that people. The momentum just will build on itself and we'll start to get this RE rating and that will bring more companies to market and. And the private equity guys could relist loads of companies over the next few years if the market conditions were conducive to that.

[Merryn Somerset Webb]

Well, it is true, isn't it? All studies show that the greatest investment method of all time is value plus momentum.

[Richard Staveley]

Yeah. And it's something I have to say, I'm always learning. And the whole time in this cab, the moment you think you get kicked in the nuts, basically. And the reality is that I wish I'd learned it earlier, but if you. If your kind of DNA is value, which might. Which mine is, you know, value, investors typically always sell their stocks too early and don't, because they think momentum's like sort of a dirty habit that, you know, sort of something you shouldn't really, you know, you don't want to. You. You want to have a Purest return. And you know, you buy it super cheap, you know, and what everyone else is sort of behaviorally can't stand it and then you sell it to them. But you kind of running your winners is something I learned about halfway through my career and that's definitely helped me get a bit better. One of the cool things about Rockwood actually is that we can really do that. So I think what didn't help me with making that learning was that in oik funds, which I mainly ran, and pension funds or anything pension funds before, is that you sort of run your winner, but because of the kind of liquidity and kind of portfolio construction rules around those sorts of funds, you just, you're always sort of chipping away at the top of the position, just trimming away at it and you never really compound up the whole thing. So in Rockwood, we're quite happy to run our winners up, which we've mainly done.

[Merryn Somerset Webb]

Brilliant. Well, thank you very much. I think we've covered an awful lot of ground there in half an hour. Well done. Ash, can I ask you one last question? What are you reading?

[Richard Staveley]

Oh my God. That is good. Oh my God. It's really sad. People that know me, I'm actually going to got three on the go. I'm reading some. I'm read. I can't even because I've got the set. So I'm reading some PG Wodehouse again at the moment. I think it's called something like very calming beans, crumpets and whatever. It's kind of quite fun. It's such great writing. I'm reading. I've just started Sorkin's new book that's just out on 1929 and I had the the pleasure and honor of going to a talk by Charles Moore recently who's who wrote the biography of Margaret Thatcher. And I was rereading that because it doesn't matter what your political things are. We definitely need kind of like difficult leadership that she was prepared to do in this country, in my opinion. Now, you know people that kind of. That don't mind being unpopular basically for. For their. For what they really believe in and have beliefs.

[Merryn Somerset Webb]

Brilliant recommendation. Thank you very much.

[Richard Staveley]

Thank you.

[Merryn Somerset Webb]

Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts and keep sending questions or comments to marinmoneyloomburg.net you can also follow me and John on Twitter or x. I'm at marionsw and John is JohnStepek. This episode was hosted by me Marin Thumbset web it was produced by Semisadi and Moses Andam Sound designed by Blake Maples and Kelly Gary. Special thanks to Richard Staveley.

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[CVS Caremark/Verizon Business Advertiser]

As a contractor I don't pay for materials I don't use, so why would I pay for stuff I don't need in my mobile plan? That's why my biz plan from Verizon Business is so perfect. Now I can choose exactly what I want and I only pay for what.

[Verizon Business Advertiser]

I need right now with my biz plan. Get our best price as low as 25 a line. Visit verizon.com to get started today. New lines only. Price per month with five plus lines includes auto pay and paper free billing and promotional discount, taxes, fees, economic adjustment charge applicable. Add ons prices and terms apply. Guarantee applies to base monthly rate and stated discounts only. Add on prices. Additional offers in January 5, 2026.