This week, for Portfolio Adviser’s Monday Manager series, Richard de Lisle, lead portfolio manager, VT De Lisle America fund shares advice given about human behaviour in markets, how this cycle compares to the 1970s decline of the ‘Nifty 50’, and the many ways to play AI without investing in tech stocks.
The Monday Manager series covers fund managers that have worked on their fund for over three years, and where fund assets are over £100m.
Give us a brief overview of the VT De Lisle America fund. What sets it apart from its peers?
The fund was set up in 2010 to be in the best asset class. Over the last 100 years this has been American small-cap value stocks. What sets us apart is that we don’t feel the need to be weighted against any index and so our diversification is mainly with regard to risk management. The objective is to maximise returns on a risk adjusted basis so we may, for instance, get very excited about an arbitrage on an expected 9% return even though our long-term rate is much higher.
See also: De Lisle Partners: A Berkshire Hathaway AGM like no other
What major shifts have you observed in terms of investor behaviour throughout your 45 years’ experience managing US equities?
If you live long enough you may be able to see every type of market. This is what Bob Farrell, chief market analyst at Merrill Lynch, told me in 1980. He remains the most pragmatic intellectual in the US market that I have ever met. The reason is that a market can only repeat once it has fallen from memory. Investors, on the other hand, don’t change their behaviour and that is why we feel that it will be a long time before AI provides a serious threat. The markets characterise what it is to be human and so are the most difficult to emulate.
Large-caps, or the mega-cap tech companies known as magnificent seven, have dominated headlines and performance in recent years. How has this affected small caps?
Large caps have dominated since the Great Financial Crash (GFC), originally as the FANGS and then as the magnificent seven. They evolve; people forget the ‘N’ was Netflix not Nvidia. This has affected small caps by not only making them unloved but also uncared about. Since we set up the fund, small caps have experienced one of the most prolonged periods of relative underperformance in the last 100 years. While this has made our timing – based on our desire to maximise returns for investors – more challenging, we have still delivered returns of around 14% a year. Right now, the differential P/E between large and small is at a maximum, which favours investing in small caps.
See also: Richard de Lisle: Why we can’t go green without nuclear
How does this market cycle compare to others you have seen in your investment career?
This market cycle shouldn’t compare to others I’ve seen, as I’m not old enough, but there are similarities with the 1972-3 decline of the ‘Nifty 50’ (magnificent seven today), followed by energy dominance. In 1993 James Carville joked he wanted to come back as the bond market because that can intimidate everyone. What happened in the 1990s is less relevant, and today energy and other commodities are the most important, with bonds now dutifully following along behind them.
I have recently been reviewing one of my formative investment heroes, Sheikh Yamani, the Saudi oil minister. As a teenager in the 1970s I idolised him as the most powerful man in the market. Whenever he spoke, suave and polite, reminding me of Omar Sharif, the market always collapsed. This was not a fantasy intimidator, this was a real person who knew what he was doing.
Today it feels we are in a similar market cycle. While the market is idolising American statements on the Middle East, we are paying close attention to every opinion.
What have been the top-performing sectors in US small-caps over the past few years? Where have you been exposed to these?
In the last few years, the top performing sectors have been the beneficiaries of Joe Biden’s Infrastructure Act followed by the onshoring boom. We have benefitted in many stocks as this trend has also been caught up in the AI infrastructure boom. For example, we bought datacentre builder Sterling Infrastructure at $34, electronics engineer Celestica at $39 and chemicals manufacturer Hawkins at $35, all up five- to 10-fold over the last three years. Uranium producers have had a similar boom, and we retain a 10% weighting in this sector having been investors since 2018.
How is AI represented in US small caps and how are you exposed?
There are many ways to play AI without investing in technology – which we don’t hold – as it is too expensive. We have about 20 stocks in different areas of the datacentre build-out, the most important being Everus Construction, which fits them out. Most of these stocks are up strongly but the aggregates are still lagging, maybe as they’re a little obscure for the market as yet, but insiders are buying keenly in Amrize and Titan America.
See also: Interview with Richard de Lisle, VT De Lisle America Fund
What has been the biggest lesson you have learned from investing?
Flexibility. We approach investing with humility, recognising that when the market sets on a narrative, it is foolish to oppose it.
What’s your outlook amid this volatile geopolitical backdrop? How can investors protect portfolios?
We take the usual view that Europeans will prove more prescient on the geopolitics than optimistic Americans and liken the backdrop more to 1973 than 1990 at the moment. As such we are heavily weighted to materials, energy and industrials (MEI) groups. These sectors now go by the modern acronym HALO (hard assets, low obsolescence).
The war with Iran has caused us to increase our weighting in datacentre related stocks because datacentre developers are more impervious to rising energy prices than US consumers. We have also increased holdings in all types of stocks that benefit from increased energy price differentials around the world.
We do not expect the US to be badly affected with its reserve currency and net producer status, so inflation in the US should not reach levels similar to the 1970s. However, we are very light on consumer stocks because we think they are badly positioned for the negative consumer wealth effects.
See also: De Lisle Partners: Energy is the real winner of the AI race
