Morningstar Advisor - Spring 2007 - 47

Arnie Schneider Yet no one who has observed Schneider’s career would be surprised by those numbers. It’s in the Water Tucked in a suburb of Philadelphia, just a few short miles from Vanguard’s headquarters and the office of Wellington Capital Management, sits the home of lesser-known Schneider Capital Management. But being in the shadows of two fund giants doesn’t concern founder and deep-value investor Arnie Schneider. In fact, Schneider’s low-key nature is the source of a running joke in the office. An employee kids that the staff had commissioned an Italian marble sculpture of Schneider to adorn an empty space near the entrance and were simply waiting for it to arrive. That couldn’t be further from the truth. Aside from a couple of nice meeting rooms, the firm’s new office space has a small, humble feel to it. Schneider’s personal office is at the dead end of a hallway, a location he chose on purpose to minimize distractions. His willingness to hole himself up in an office without accouterments has endeared him to longtime clients and shareholders. That and the returns he has earned them, of course. “Very few small-cap managers have Schneider’s credentials and have done the job he’s done, not just in terms of his results, but his commitment to his investment base,” says advisor Lon Morton, CLU, of Morton Capital Management in Calabasas, Calif., who has clients invested with Schneider. Performance has been stellar at Schneider’s separately managed accounts and the two mutual funds he runs, Schneider Value SCMLX and Schneider Small Cap Value SCMVX. Both mutual funds rank in the top 5% of their respective Morningstar categories for the trailing three-year period and have produced stellar since-inception returns as well. Schneider got his start around these parts. Right out of school, he took a job at Wellington, the same place where longtime Vanguard Windsor VWNDX manager John Neff built his reputation as a value-investing legend. Schneider started as an analyst and quickly progressed to managing an institutional value strategy. In short order, Schneider proved that he was another in a long line of stars to emerge from Wellington. But Schneider’s key influence wasn’t Neff or Chuck Freeman, Neff’s successor at Windsor. Instead, it was a lesser-known skipper, John Nyheim, a skilled veteran value investor whom Schneider describes as “a giant as an investor.” “When he retired from Wellington in 1992, I moved up,” Schneider says. “My style differed from his somewhat, though. He was more yield oriented. I’m more deep value and more concentrated.” And Schneider doesn’t care where he gets his returns from. “I’m indifferent between dividends and stock price appreciation. At times when people are chasing dividends, it usually becomes less appealing from a valuation standpoint.” Valuation is critical to Schneider’s investing approach. He has a healthy appetite for individual companies or entire industries operating at rock-bottom earnings levels. He likes to buy in when everybody else hates them and hold on until earnings normalize. Spotting trouble spots is the key to Schneider’s success. He spends half his time looking for new ideas. “It’s half perspiration and half inspiration,” he says. “For every 10 stocks I look at, only one makes it to an analyst, and for every 10 stocks an analyst looks at, only one makes it into the portfolio.” He doesn’t restrict himself to traditional value sectors, either. For example, Schneider has invested in semiconductor equipment stocks, which he picked off the bottom in 2002 and rode into the rally in 2003. More recently, he has been scooping up shares of computer maker Dell DELL. Homebuilders are one of the newer themes that have made the cut during the past year. The continual flow of negative news related to the industry took its toll on stock prices. Schneider thinks homebuilders are now operating at well-below-trend earnings levels, and he doesn’t think profits will get much worse. He believes that excess supply measured by home inventories is near a peak as speculative investors clear out of the market. Meanwhile, houses are becoming more affordable as personal incomes have grown, so he’s convinced that demand will pick up again. His thesis doesn’t end there. Within the homebuilding industry, he’s sticking with market leaders that can guarantee steadier work for subcontractors and thus have the negotiating power needed to control their expenses. How To… Locate Homebuilders One of Arnie Schneider’s newest themes is homebuilders. You can find sturdy homebuilders in Advisor Workstation and Principia Stocks. Use the following screen: Industry Home Building None AND Economic Moat Not AND ( Business Risk OR Business Risk Average Below Average ) Keep Up With Schneider Funds Don’t miss the next time Arnie Schneider opens or closes a fund. You can set up e-mail alerts from the Advisor Workstation home page to track changes in Schneider’s funds and other securities. MorningstarAdvisor.com 47

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Morningstar Advisor - Spring 2007

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