GuruFocus had the pleasure of hosting another presentation featuring Richard Simmons, the portfolio manager of Derby Street. Simmons started Derby Street in 2013 and has over 22 years of investment experience.
In 2001, he was authorized by the FCA via Credo Capital, a multibillion-dollar wealth manager in London, to become a professional money manager, and prior to that Simmons was investing on his own and for friends and family accounts.
He started his career in commercial banking in 1986 and his positions included head of Bank of Ireland's Corporate Banking center in London and assistant director of Henry Ansbacher, the merchant bank. Between 1997 and 2001, Simmons was a non-executive director and a lecturer at Cass Business School and Imperial School of Management.
As his career became deeply focused on equity investing, he was commissioned by Financial Times/Longman to write one of the first academic studies of Warren Buffett (Trades, Portfolio), "Buffett Step by Step.”
Simmons graduated with an MA in philosophy, politics and economics from The Queen's College, University of Oxford and holds an MBA from Cass Business School.
He was born in 1964 and he lives in London with his wife and two children.
Watch the full live stream here:
Key takeaways
Simmons started off his presentation with a quick recap of the background on Derby Street and its two funds. He explained that the funds are fairly concentrated with the top positions making up around 10% to 12% of the fund. He also added that he will occasionally look at bonds when there are good plays to be made.
He continued to explain that the U.K. stock market and the European index have failed to make big gains over the last eight years or so. In comparison, the funds have been exceeding these benchmarks consistently throughout that time period.
Simmons then turned to some specific performance numbers, but first he recalled his first presentation in which he explained that the funds started the pandemic with a higher than average level of cash on hand. Thanks to the excess cash, the funds were able to buy into many holdings as the market crashed.
The U.K. fund has been up over 20% through the first half of the year, which has beat market returns by about 11% and the European fund is up around 16%. Simmons highlighted how these strong returns are following very strong returns from last year. These results have placed Derby Street in the top 1%, if not at the top, of its Morningstar categories.
Simmons transitioned to revisit his past stock examples and shed light on their performance over the past six months. His previous examples of Naked Wines PLC (LSE:WINE, Financial) and Morses Club PLC (LSE:MCL, Financial) have both done well since his last presentation with strong positive returns. Each business also has strong growth factors or changes that have occurred in the last six months and Simmons is excited to see how things go moving into the future.
Stocks
Once Simmons finished his recap on the performance of Naked Wines and Morses Club, he turned his attention to a new position that has taken up a large position in the U.K. fund. Electra Private Equity PLC (LSE:ELTA, Financial) has landed as an usually large 15% position at the top of the portfolio. The company is in the process of liquidation and offers a unique opportunity. Simmons explained that he has owned the company since 2018, but has made major additions to it during the pandemic.
He continued to explain that he has received a significant portion of the investment back through special dividends and that he feels confident in the company handling the liquidation process. In his opinion, the value of all the separate parts of the deal should easily exceed what the stock is currently trading at. He expects the upside to be anywhere from 30% to 80% and the downside risk should be relatively low.
Questions
Simmons turned over the majority of his time to answer as many questions as possible from the audience. The first question he jumped into asked him how he goes about evaluating a potential investment.
He started off by explaining that he spends each morning reading as many results reports from business around the world as he possibly can. This allows him to discover new businesses and remind himself of any companies that he has been keeping an eye on. Overall, his focus is to find quality.
He continued to explain there are many negative things that will jump out immediately, including debt, but that things like net cash can be a big positive. As he reads through these documents, he is also considering things like industry comparisons and how a management team has been acting. Should a company stand out as a potential investment, he will run it through one of his own screens.
Several questions that came in back to back asked Simmons if he was concerned with the profitability of Naked Wines (LSE:WINE, Financial) and some of the numbers that they have reported on their balance sheet. He explained right off the top that the company has intentionally maintained a balance sheet that shows a lack of profitability.
He continued that the company loses money on purpose through its marketing outreach programs. They send out vouchers for significant discounts through services like Amazon (AMZN, Financial), which are a loss each time they are redeemed. However, these marketing promotions can gain the company return customers, which are highly profitable.
Simmons also explained that the company will likely lack a profitable balance sheet moving into the future because it will continue to invest its cash flows into marketing. He hopes he will continue to see this and that Naked Wines will refrain from overspending because their strategy has set them up for solid growth moving into the next decade.
