Top US fund manager fires warning over US economy

A man from the fag end of the slide-rule generation, now in his mid-fifties, Richard de Lisle bade an early farewell to big-time investment management to take early retirement by the sea, where he opened a children's skating rink to amuse his two young children and other infants of the town.

Today, he says he rarely leaves Poole, in Dorset. But his money sure does. He runs VT De Lisle America Fund (the VT stands for Valu Trac, an ugly Americanism), an enterprise that fully lives up to its moniker.

Its record is remarkable, particularly given that de Lisle and his wife Sarah, ex-Goldman Sachs and a former UK chess champion, combine management of the fund with the demands of young children and active ownership of a Poole café. The fund rose by some 43% in 2013, the best performance since its inception in 2005. Only once since has it failed to beat the S&P 500 index.

The UCITs version (available since August 2010) is fifth over one year and first over three years in the IMA North America sector, according to figures.

Small companies

VT De Lisle America is tiny, with assets of just $28 million (£17 million). It is largely owned by de Lisle and his wife, long-standing friends and Emmanuel College, Cambridge, where de Lisle read economics. The fund's focus is currently on small companies, where markets are tight and liquidity can be a problem. However, in 2013 US smaller companies were the best-performing US equity asset class.

The smaller company index gained 38.8%, against 34.8% for mid-cap and 32.4% for large companies. Remarkably, some might think, VT De Lisle America's $28 million is scattered over some 108 companies. He sees no problem in taking more money on board, but says he'd 'have to have help' if assets were to approach $200 million.

To date, however, only $3 million or so has come into his fund from investors who were not known to him or invested at the outset. The names of many of his holdings, which are mostly listed on Nasdaq but also on the American Stock Exchange and Wall Street - he holds no over-the-counter securities - will mean little to UK investors or many in the US for that matter.

But his approach is familiar enough - thematic and top down. Last year, for instance, his view was that discretionary spending would accelerate and produce rewards, and also that the widening split between haves and have-nots was a two-sided flip: dollar stores for the hard-up and up-market emporiums for the wealthy.

US spending on pets has been a great theme to back. His largest holding is a firm that supplies veterinary surgeons, but prices of other pet-related companies have, in his view, become too stretched. Diligence paid off, however, when he found an attractively priced company that makes dog kennels.

Less orthodox is his unwillingness to talk to target companies either before or after buying them.

'When I worked in the City I used to go to the US a lot. Now I don't go at all. I don't really leave Poole. But there is an inverse correlation between the time spent meeting them (company executives) and what you learn.'

He adds: 'I don't have the money to fly around the country, knocking on doors or going on guided tours with 20 other fund managers to attend polished presentations. But I may listen to them. I can dial into conference calls and get a feeling for what is going on, and also look at the transcripts - conference calls are transcribed and these provide a lot of information.'

Investment background

De Lisle certainly brings experience to the table. He says: 'I am familiar with analysis, and I've seen a few investment cycles.'

He started investing in shares in the mid 1970s while at Cambridge. He rejected the Labour privatisations of the day such as BP and chose smaller companies instead. He used his student grant cheques - 'students then got paid to go university' - and also invested on behalf of friends, who used theirs.

Today, some of these chums are fellow travellers in VT De Lisle America. De Lisle entered the City in 1979 and became an equity salesman for Merrill Lynch before joining Dean Witter in 1984. He progressed to become managing director of the firm's international section, but he left when the firm merged with Morgan Stanley in 1997.

'Morgan Stanley stood for everything I did not like,' he says. Dean Witter was a retail broker and the new owners steered its client base toward Morgan Stanley funds. De Lisle then represented a US new issue investor in London for a while 'and made a wealthy American even more wealthy'.

But he became disillusioned with equities, moved to the south coast in 2000 and started a small Cayman Islands-based fund until hefty running costs took their toll. This fund was the forerunner of VT De Lisle America. He says the turnover of his portfolio last year was some 25%, but that this figure is misleading.

'I trade the names a little,' he says. 'It is a good test to look back and see what you've sold. I am a better buyer than I am seller, and this makes a difference.'

However, a change of direction may lie ahead. 'I think small companies will continue to do well for us, but it is becoming a neutral call between big and small. Pendulums swing and small companies could reach over-valuation in four years.'

Uncertain US picture

He has sobering advice for those who call for an early end to the tapering of quantitative easing in the US. 'Once the government stops putting money into the economy, we're in trouble. Smaller companies need positive signals to do well, and as they are perceived as being a more risky equity asset class, they go down as soon as things look like going wrong.

'But I think there is a stabilisation process going on. Ben Bernanke [who has just stepped down as president of the US Federal Reserve] knew all about the Great Depression, and that in 1937 there was monetary tightening as everyone thought the economy was out of the woods, and that everything collapsed again. That was a mistake they won't make this time. The Fed understands the fragility of the recovery, and if there are bad figures it'll respond to them.'

De Lisle is anything but a hawk on inflation.

'There will be inflation, but not when people expect it. It might not happen for another 20 years. When the money supply has expanded as it has, inflation is an easy call. But the consumer prices index in the US is actually falling,' he says.

Moreover, globalisation, technology and the 'destruction of unions' is a further negative for the inflation lobby. 'In fact, real wages in the US are now below the level of 1964, an astonishing statistic. Since 2009, 30% of the increase in incomes has gone to those in the top 1% [income bracket].'

Ultimately, de Lisle says, his main concern is that there will soon be another US recession. 'The market is now telling us another recession is a possibility. The price/earnings ratios on growth stocks are going up and up, and these are the companies that show growth whatever the state of the economy, like Google. We're invested in stocks that do well in a slowly improving economy.'

One of his favoured sectors is community banks, an area of the US economy relatively cushioned against recession. 'These banks - yes, the type Bonny and Clyde used to rob - tend to be owned by local worthies. In time, they merge with each other. That's when I get uplift.'

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment