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Alternative Market Briefing

The stock's future counts more than its value for this European equities manager

Monday, May 03, 2021

Richard Simmons
B. G., Opalesque Geneva:

London-based Derby Street Managers buys a selection of undervalued European and UK equities based on the capacity and quality of the business rather than the traditional relative value or low P/E and price-to-book ratios. Their selection style has paid off handsomely.

"In many cases, cheap securities based on traditional value metrics are of very low quality and not cash-generating," portfolio manager Richard Simmons tells Opalesque.

"We don't see a category called 'value stocks'," he adds. "Value is really the philosophy of buying things for less than their true worth, whether they are old school 'value' e.g. low P/E for a steady business, or what is sometimes called 'growth'. An 'expensive' stock with a high P/E or a high relative P/E can still be value; it is its future that counts."

Derby Street managers consider an investment 'ideal' if it matches three criteria: it has a limited downside, a very large upside potential, and a sound business model. Two out of three may also suffice. However, where likely outcomes are more symmetrical, they demand a higher return.

The managers buy three sets of companies, he says when explaining their differentiation: "Fantastic businesses with lots of growth ahead; businesses with undervalued assets or hidden assets; and liquidating companies, solvent companies selling their assets and returning capital to shareholders.

"Our lens is identical in each set. What is the likely range of future values of the companies' cashflows and what kind of time-weighted return would we earn if we invested at a given price? The first set can provide high rates of return to our fund over very long periods of time - we have held some stocks for over fifteen years. The third set can provide much higher returns but over short periods - a year to five years. The second set is somewhere in between, with more resilience."

Richard Simmons, a manager with more than 22 years of investing experience, will be presenting in Opalesque's next webinar, Small Managers - Big Alpha, on Tuesday 11th May.

The funds

Derby Street's Cayman-domiciled UK Equities and European Equities AIFs are managed by Richard Simmons. He relies heavily on internally-generated research and fundamental analysis. He runs high conviction portfolios with a low turnover and applies patient long-term investing. Furthermore, as an emerging fund manager, he able to invest in smaller and more niche themes than the average fund.

The Derby Street strategies are long-only, fundamental value-oriented, and unconstrained. The European Equities fund, which manages €3m ($3.6m), was launched on 22nd February 2013. It returned +0.3% in 2020, +10.7% in Q1-2021 and +196% since inception.

The UK Equities Fund invests primarily in the UK or other sterling-related securities including fixed income. Also launched in February 2013, the £13m ($18m) fund returned +3.7% in 2020, +8% in Q1 and +71% since inception.

The Euronext100 index, the benchmark, was up 8% in Q1, -3.5% in 2020 and +47.6% since February 2013.

There is no fundamental difference between UK and European stocks but there are interesting differences between countries, Simmons says. "Germany, for such a successful country, has a surprisingly moribund stock market, possibly because so many of its successful businesses are privately held. There are more interesting quoted companies in Italy than in Germany! The UK is the most dynamic and largest stock market, but its largest companies are poor quality - banks, commodity producers, insurers, investment trusts, supermarkets, pharmaceuticals. Mature companies mainly. But the lower ends of all markets throw up constant surprises, as that is where you typically find the most innovative and dynamic businesses."

Derby Street Managers Ltd is an appointed representative of Eschler Asset Management LLP.

Equities in Q1

European equities advanced in Q1, according to Shroders. Hopes of global economic recovery supported sectors that fared poorly in 2020, such as energy and financials. Consumer discretionary stocks also performed well, notably car makers as Volkswagen announced ambitious electric vehicle targets. Underperformers were defensive areas that are less tied to the economic recovery, such as utilities and real estate.

UK equities also performed well. Lowly-valued, economically sensitive areas of the market extended the recovery seen since November. This was reflected in a very strong performance from materials, energy, and financials. Banks performed particularly well amid better-than-expected results and a sharp increase in bond yields as the global economic outlook improved.

Next webinar:

Small Managers - Big Alpha

With larger quantities of capital chasing the same alpha strategies and continuing to erode Alpha, savvy investors are turning to smaller and/or emerging managers as they look for alternative sources of return. Opalesque presents a carefully screened panel of investment managers worth taking a look at.
- Nadine Korehnke, Quantumrock
- Elias Nechachby, Icon Asset Management
- Paul Lucek, Ridgedale
- Richard Simmons, Derby Street

When : Tuesday, May 11th, 2021 at 10:30 am ET
Free registration here:

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