Richard Staveley: Reeves must do more to help UK small-caps

Richard Staveley, the Citywire AAA-rated fund manager of Rockwood Strategic (RKW ), speaks to us after the investment trust wins ‘Best UK Smaller Companies Trust’ in our annual awards last week.

In the recording, Staveley says the government needs to do more to incentivise investment into UK smaller companies, saying he is looking forward with ‘bated breath’ to the chancellor’s Mansion House speech tonight.

Can’t watch now? Read the transcript

What are the prospects for UK small-caps after the Budget? 

Richard Staveley:

The Budget was a pretty seminal moment actually. I think, though, it’s easy to focus just on the short-term rather than the long-term drivers of small-caps, which are always very strong. In fact, if you look at the UK and US over any decent time period, UK small-caps tend to give you a return premium over larger shares. That said, this Budget didn’t really do much to make it more attractive to invest in UK smaller companies. They increased the rate on CGT [capital gains tax] –that’s not a further incentive, that’s a reduced incentive to invest in shares – and they halved the incentives to invest in the AIM market. Again, that doesn’t incentivise investors to look at UK smaller companies. 

Furthermore, UK smaller companies are on the whole more domestically oriented. There’s a lot of international earnings and we’ve got quite a lot in Rockwood’s portfolio, but there’s a lot of domestic exposure and the increase in employers’ national insurance (NI) contributions is obviously a negative for those that have more employees than others. 

That said, this Budget’s come after a long period of uncertainty and I think that moment of certainty’s probably quite positive now and we can start to maybe move forward. It also comes at a time when valuations are very, very low, relative to history and particularly relative to other overseas markets. That is a driver of medium-term returns, so I’m constructively positive, but we do need more from this government to really get UK smaller companies going. And I would say I’m looking forward, or with bated breath, to see what happens in the chancellor’s Mansion House speech and whether they do something to help flows in UK small caps, which have been negative for some time.

What opportunities are you seeing? 

Richard Staveley:

We’re seeing a lot of opportunities across different sectors as well. The fear of the potential withdrawal of the AIM reliefs completely has meant that a number of shares were really quite weak into the statement. We actually deployed about 3% of net asset value into new shares in Rockwood around the time of the Budget. We’re not going to reveal those to you today, you’ll hear about them soon. So there are opportunities around. We’re also seeing a lot of stocks, which we know have been affected by the outflows from UK smaller companies – a large firm just last week closed down its UK small-cap team and another fund has been wound up. A fund like Rockwood, which has been issuing shares and growing, is on the other side of that and able to take advantage of the forced sellers where the opportunities are even better. 

How can the UK stock market’s discount narrow? 

Richard Staveley:

I think it requires UK gross domestic product (GDP) to pick up from – let’s face it – pretty pedestrian levels relative to particularly the US economy and I think interest rates continuing to fall will also be a key driver of a UK rerating. Hopefully, inflation doesn’t pick up, we’ll see how the Budget affects things, but the reality is interest rates coming down are likely to be helpful. Those are the key factors.

Is this a golden age for UK small-cap investors? 

Richard Staveley:

Wow. Is this the golden age? Probably no, sadly. I suspect the golden age was in a period when there was almost no information transfer, extremely inefficient markets, probably in the 1950s and 1960s when there were massive returns made by people who basically knew lots of things that others didn’t. That said, let’s be honest for a moment, the low valuations are a key criteria for driving returns, the small-cap effect is likely to continue medium term and actually, if we can just turn the flows, we should have a very strong period for UK smaller companies. 

How big would you like to grow the trust? 

Richard Staveley:

Well, we’ve stated publicly that we think the capacity is about £250m. We took the fund over at Harwood Capital which, after the distribution for shareholders, was about £35m and now we’re up to £90m. So, we’ve got a long way to go to capacity, but we definitely don’t want to get bigger than that because our opportunity set is really in those smallest companies in the UK market and they tend to be under £250m.