Money managers say that although the stock market is doing well right now, investors should still be cautious. - Photo from

Manager who prizes value stocks sees slow recovery


BOSTON — When Charles de Vaulx and Chuck de Lardemelle launched a pair of mutual funds, it came at what might seem an inopportune time: Oct. 1, 2008, just as markets were collapsing.

But that suited de Vaulx, whose defensive investing style helped him escape relatively unscathed from previous downturns.

By year's end, de Vaulx could take comfort that his biggest fund, IVA Worldwide, gained nearly 3 percent while broader markets lost more than 20 percent.

That outperformance — the result of a conservative approach and the fund's heavy cash stake — was fleeting. The $1.8 billion fund has lagged rivals in the recent market rally because of the same defensive traits that were an advantage last year.

These days, de Vaulx, a self-described "nervous Nellie," is playing it even safer than usual, arguing the rally has gone too far. Just 33 percent of IVA Worldwide's portfolio is in stocks, with 29 percent in bonds, 24 percent in cash and 14 percent in other assets, mostly gold bullion.

If it seems overly cautious given that the market has still yet to recover all the ground it lost last year, consider de Vaulx's record. His reluctance to buy tech stocks in the late 1990s dot-com boom proved smart in 2001. That year, he and his mentor, well-known value manger Jean-Marie Eveillard, shared Morningstar's "International Stock Manager of the Year" award at First Eagle Funds. De Vaulx was runner-up for the same award in 2006.

Shortly after gaining that second honor, de Vaulx pulled off a surprise, leaving First Eagle when he found the $40 billion he was managing had become too large to fit his investing style.

As a value investor, de Vaulx closely watches whether stocks are overpriced, typically holding favorites for years. He invests globally, in bonds as well as stocks of all sizes. When he can't find bargains, he holds plenty of gold and cash. The goal is minimizing losses rather than maximizing gains.

Last year, de Vaulx brought that approach to his new fund shop, New York-based International Value Advisers, where he and de Lardemelle launched not only IVA Worldwide, but IVA International, which differs from the other in that it doesn't invest in the U.S.

In part due to de Vaulx's reputation, Morningstar gave both funds rare just-out-of-the-gate endorsements in December. IVA Worldwide has grown to $1.8 billion, while IVA International has $394 million.

In a recent interview, de Vaulx explained why he and co-manager de Lardemelle are being so cautious now with both funds:

Q: What's your take on corporate earnings, which have helped fuel the rising market?

A: If you look at the first six months of this year, what was striking was that the top line (revenue) was even worse than forecast. The only reason why earnings were better than expected was that cost-cutting was better than expected.

Q: Where do you see the market heading after the rally that started in March?

A: Basically, we think this rally has gotten ahead of itself.

In the next 10 years, equities will probably give returns of 4 to 7 percent, which is better than in the past decade, when they've been basically flat. That's ultimately what matters, rather than trying to predict the unpredictable — which is what the market decides to do short-term.

We are not saying U.S. equities are overvalued. Equities, especially in the U.S., will probably deliver positive returns, but very modest ones in the next few years.

As long as you understand as an investor that those returns will be modest and come with a lot of volatility, you should hold some equities long-term.

Q: Why do you expect volatility will stick around even though the U.S. economy appears to be stabilizing?

A: To confuse recent events with the beginning of a long V-shaped, happy recovery is wrong.

Our hunch is U.S. consumers are very scared. They went nuts for the past 15 years, and they will exercise restraint.

Even though the consumer savings rate has gone from 0 percent a couple years ago to almost 7 percent now, we think Americans' net worth has taken such a beating that many now realize they don't have enough for retirement. I think their savings rate will grow from 7 percent today to 10 percent over the next three to five years. Any 1 percent increase in the savings rate has a minus 1.1 percent impact on gross domestic product growth because people are putting less money into the economy.

Q: But even if U.S. consumers get stingier, won't overseas growth in countries like China stimulate the global economy?

A: Even though China is huge, the U.S. remains the locomotive of the world economy. In 2008, the U.S. consumer accounted for 16.6 percent of global gross domestic product. A distant second is Japan at 8.1 percent, and No. 3 is China at 7.3 percent. The Chinese consumer would have to consume like there's no tomorrow to offset the fact that Americans are likely to exercise restraint for the next three to five years.

Q: What indicator are you watching most closely these days?

A: U.S. unemployment. I see no evidence of new job postings, and no one is hiring. The consumer does account for 70 percent of the economy in the U.S., and you can't fix the balance sheet of a consumer the way you fix the balance sheet of a company. A company can do an equity offering, and convert debt to equity, but you can't do that with consumers.

Q: What global indicator are you watching?

A: Bank lending in China. Not only has there been huge government fiscal stimulus in China, but the banks have been told to lend a lot. Banks loan portfolios have gone through the roof over the last nine months. Even officials in China are starting to publicly worry about it. Anecdotal evidence suggests lots of those loans were used to finance sloppy projects.

So the health of the Chinese banking system is something to monitor over the next year or so. If China were to have a banking crisis, that would be very painful.

Q: You left First Eagle when your were managing $40 billion, which was too much for your liking. Is there a limit on how much you'll manage at IVA? The firm has about $3.5 billion now.

A: We don't want to manage more than $10 to 15 billion. We want to remain small, nimble and flexible.

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