There is a perception among the general public that most fund managers’ careers closely follow the same well-trodden path: public school, Oxbridge, then off to work in the City.
Yet it was the interruption in this sequence that set Richard de Lisle down the path of fund management – and continues to shape his approach to running money more than 40 years later.
As a child, the fund manager originally attended a “very, very minor public school” until his father lost all his money in the bear market of the early 1970s, at which point the young de Lisle was taken out and transferred to the local grammar school. He said this began the start of a quest “to find out what was bringing this calamity to my family”, adding: “I've spent the rest of my life doing it. When I went to university, I spent my spare time in the reading room looking at The Financial Times and gambling with my fellow students’ grant cheques.”
He did this with some success, noting that every student who trusted him with their money remains invested with him to this day through his current vehicle, VT De Lisle America.
De Lisle invests in what he describes as “the best long-term asset class in the world”: US small- and mid-cap value. He said that, after more than a decade of lagging behind US large cap growth, it is easy to forget the returns this market is capable of generating, before adding that being this out of favour “puts us where we want to be”.
Performance of indices over 20yrs
Source: FE Analytics
“We'll do anything to get a tailwind, so essentially I buy rubbish stocks and they go up,” he explained.
“That's how it works. Because if you've got a tailwind, they go up anyway. The best way to look at that is through the demographic lens, as demographic plays last for a long time. We eventually tend to leave them because they become overpriced.
“But the pandemic accelerated things quite a lot and that helped us because these things tend to be slow to be picked up by Wall Street. We have this tailwind running for a long time that suddenly becomes a strong tailwind, then we rush up, which is what's going on at the moment.
“But the particular tailwind is, if you're in small and value and you don't have a headwind, you're going to win, it is as simple as that. You don't really need a tailwind: because of cognitive dissonance, value stocks do better anyway.”
De Lisle cited interactive toy store Build-A-Bear Workshop as an example of a value stock that has thrived through a lack of a headwind.
The growth of Amazon led to a fear that every toy shop in the US would go the same way as Toys“R”Us, and it was assumed last year’s economic lockdown would be the final nail in the coffin of a company whose share price had been sliding since 2005.
This meant de Lisle was able to buy in for a price equivalent to $100,000 a store, a valuation that he said not only overlooked the importance of experience when shopping with children, but also the role leverage played in Toys“R”Us’s demise: he noted Build-A-Bear’s only debt is in the form of vouchers.
The market only came around to his way of thinking this month, but has already proved he made the right call.
“Last week it released its earnings and its share price went from $10 to $14 in a day,” the manager said.
“Now the point about that is, retailers don't go up 40 per cent, tech stocks do that sort of nonsense, retailers don't because they're much easier to predict.
“The fact that it did tells us something very important: Wall Street got it completely wrong and doesn't understand the company.
“But it also tells us that there's more to go.”
Performance of stock since listing
The challenge now is figuring out when to sell, with the manager resisting the temptation to take profits too early.
“It earned $0.66 [a share] when it was expected to make a loss,” he continued. “It's supposedly a big quarter, so you say ‘what could Wall Street put on that?’
“Well, Wall Street, could easily put 12x on that. If it does work, let's conservatively say, $2.5 this year times 12, it goes to $30.
“Does it go to $30? No, it goes higher, because if it goes there, it's got the momentum. I'd say mid-30s because at that price per unit, you get an asset valuation consistent with other more successful retailers, at a reasonable multiple still well below the market. We'd take that.”
This value strategy means de Lisle has missed out on many of the tech stocks that have propelled the US market ever higher over the past decade.
He has just 4.2 per cent of assets in telecom, media & technology stocks, compared with about one-third from his average peer. Although this already sounds low, the manager said his weighting to tech alone is closer to 2 per cent, adding “I would prefer 0 per cent”.
“Zero would be our natural weighting, but we found a couple of stocks that are just distributors and they're about 12x P/E,” he continued.
“I have no regard for tech at all. It's an overpriced sector, it's a long-term underperforming sector. People say, ‘you just have to buy the FAANGs and forget about it’, but you couldn't, because 10 years ago it wasn't obvious which ones were the FAANGs.
“They've had a good run based on how to play monopoly policy and declining interest rates, but we have no interest in them.”
An increase in inflation and eventually interest rates is one of the reasons why de Lisle is concerned about the prospects for the tech sector and why he is anticipating a revival in small-cap value
He said the closest parallel in history to the trillions of dollars being committed to fiscal stimulus is the Marshall Plan of 1946, which aimed to get Europe back to full employment at any cost after the war.
However, the manager also sees another worrying parallel with the start of the 1970s, and the bear market where his father lost his fortune.
“If you want to pay 37x trailing earnings for Starbucks, I expect you will do alright so long as interest rates don't go up,” he said.
“The analysis of Starbucks today is very similar to the analysis of McDonald's in 1968.
“In 1968, McDonald's goes into the most beautiful saucer formation from the 1968 high until 1982. You get your money back, but only after 15 years.
“And that is exactly where I think the FAANGs are today. If you take any of those Nifty Fifty names from back then, they’re all on too-high multiples, but they all grow into those multiples as interest rates go up in the 1970s and growth is discounted.
“The thing about the Nifty 50 is that if you bought them in 1968, they were outperforming again by 1989. That's the thing everyone misses.”
Data from FE Analytics shows VT De Lisle America has made 447.54 per cent since launch in August 2010, compared with 335.86 per cent from the Russell 2000 index and 331.11 per cent from the IA North America sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £68m fund has ongoing charges of 1.1 per cent.