Two small-scale investment funds showing signs of promising growth
In the world of investments, smaller companies are gaining traction as potential growth drivers. This is despite two bids for Elementis and XP Power being rejected this year, as they were deemed to undervalue these companies.
Two investment trusts, Rockwood Strategic and Odyssean Investment Trust, are particularly interested in small companies with exceptional prospects to navigate political and fiscal headwinds. Both trusts have shown impressive returns in the past few years.
Rockwood Strategic, with a market value of £90m, boasts a five-year return of 129%, outperforming even Odyssean, which has a market value of £230m and a five-year return of 66%. One of Rockwood's key holdings is Dialight, an industrial LED specialist, while NCC, a cybersecurity consultant, makes up a large portion of their portfolio. Xaar, an inkjet manufacturer, is another significant holding.
Odyssean's portfolio includes Capita, a company valued at £240m compared to £2.6bn of sales, which is considered a "biggest blind spot in the UK market." Filtronic, a telecoms technology high-flyer, makes up 10% of the portfolio and has key contracts with SpaceX's Starlink phones network, despite a disastrous acquisition that has brought its value down to £160m.
Small caps have underperformed since 2016 and now trade at less than 12 times expected earnings. However, average returns when small caps were this cheap have been 22% over the next 12 months and 42% over the next 24 months. This trend is reflected in the performance of RM, a supplier to the UK education market, which recently secured a new £100m contract with International Baccalaureate, underpinning growth of 10% per annum and 22% margins.
The FTSE 100, on the other hand, trades at a 15%-20% discount to its long-term average. Investors are also showing interest in smaller-cap trusts, such as those managed by Robin West of Invesco Perpetual, which trade on discounts to net asset value (NAV) of 10%-15%.
One such investment is Funding Circle, a lending platform that Staveley has bought 3% of, despite never making a profit. Investec thinks profits could reach £35m in two years for Funding Circle, and the share price has trebled since Staveley started buying.
In conclusion, while larger companies may seem attractive due to their size, smaller companies, when appropriately valued, can offer significant growth potential. The success of Rockwood Strategic and Odyssean Investment Trust serves as a testament to this fact.
