Morningstar Advisor - Spring 2007 - (Page 48)

Undiscovered Manager Schneider Value SCMLX Growth of $10,000K Fund Large Value $25K 19 13 05 06 07 S&P 500 with clients. On top of that, Schneider has closely controlled his capacity and proven that he isn’t willing to test the boundaries of asset size and run the risk of hurting his ability to execute the strategy. The only way to access Schneider’s strategies today is through the Schneider Value Fund. The firm is closed to all new separate account clients and has kept the Small Cap Value Fund closed to new investors for the better part of the past five years. This closely guarded door into Schneider’s funds has been by design. He has avoided the lure of firm growth because it can compromise his ability to invest. “Our culture is performance-based as opposed to asset-based,” Schneider says. “Sure, growth is nice, but we don’t focus on that. Everyone would like to grow. But if there’s a liquidity restraint, you have to have a target.” Schneider has stuck to his targets, which have been on the conservative side. As of the end of 2006, the firm was running a total of $5.4 billion in separate account and mutual fund assets; $590 million of that was in its closed small-cap value strategy. He opened the Schneider Small Cap Value fund briefly in 2006 and committed to closing it as soon as assets in the fund reached $100 million mark. That happened in a couple weeks, so the fund slammed its doors again. Those Who Have Taken Notice Agree compounding of capital.” Schneider is one of a limited number who make that cut. “Avoiding permanent loss of capital, rigorous research, a thought process that is rational and independent, and managing an appropriate amount of capital are all traits that Arnie has,” Watts says. Those closest to Schneider’s thought process—his analysts—agree. When asked what makes him a great investor, the analysts on his team point to his ability to separate emotion from investing, an attribute shared by the best value managers. Keeping emotion out of the process hasn’t always been easy, though. In 1998, for example, when Schneider’s picks were badly struggling, he asked an employee to stop showing him the returns every day. When probed more about tough periods, Schneider says, “When we do have a stretch of underperformance, it’s bad. Having a deep value style requires a steel stomach. You have to have the power of your convictions. Had we chickened out in 1998 or 2002, we wouldn’t have had 1999 or 2003.” Caution is warranted at this juncture, too, and Schneider is the first to sound the alarms about the strong run that value investing has had. The current market environment makes his job much more difficult; earnings for many firms and most industries are nearing historical highs, not lows. So the universe of battered underperformers has shrunk. The funds will undoubtedly hit rough patches from time to time as Schneider’s deep value approach carries him into difficult corners of the market, but investors should steal a page from his book and keep emotion out of it. K Karen Dolan, CFA, is a mutual fund analyst with Morningstar. Category 3-Yr. Annl Ttl Return % Large Value Morningstar Rating 15.68 3-Yr. Annl Invstr Rtrn %* QQQQQ Expense Ratio (%) 17.4 Invstr Rtrn % Rank Cat 0.85 Stewardship 2 Z * Data as of March 31, 2007 Dollar-weighted return that measures how the typical investor in the fund fared. Staying Out of the Limelight So how have the successful Schneider funds flown under the radar for so many years? For the most part, it is because the firm has an institutional heritage, focuses on one discipline, offers only two mutual funds, does virtually no marketing, and keeps tight limits on asset growth. Aside from those factors, there was another reason to keep a rather low profile in the firm’s early days. Wellington took a pretty hard line on Schneider’s ability to market his institutional strategies after he left. Schneider was asked to sign a non-compete agreement, which restricted him from going after the firm’s expansive list of clients. As a result, Schneider Capital Management remained small for several years. Despite the slow start, Schneider says he’s never regretted the decision to start his own firm. He built Schneider Capital Management around his own personal strengths and his passion for investing rather than asset gathering. Thus, he is free to spend his time generating new ideas and keeping up with what he owns while limiting the time spent Advisors who have invested client assets with Schneider have been pleased, to say the least. Not only has Schneider posted competitive returns and put a tight lid on asset growth, but he has kept fees low. More importantly, though, advisors say they have confidence in Schneider’s abilities and value the way he treats shareholders. Advisor Lyle Watts, of Cavender and Watts in Huntsville, Ala., says his firm only uses managers who “we believe have traits that can provide sustainable and consistent long-term 48 Morningstar Advisor Spring 2007

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Spring 2007

Morningstar Advisor Spring 2007 Features Departments Letter from Joe Mansueto Get to Know Morningstar’s Fund Managers of the Year Is Your Client a Stock or a Bond? Less Alpha, More Beta Than Meets the Eye Your Mileage May Vary A Clear-Eyed Look at Hedge Funds Lower Risk, Higher Returns, What’s Not to Like? Without Cash and Clout, Advisors and Clients Get Short End of Stick Get the Strategy Minus the Headaches Analyzing Funds of Hedge Funds Not All Hedge Funds Are Created Equal A Fund with a (Long) View Laying Low and Prospering A Menu of Ideas to Fill Five Market Baskets Oil and Gas Gushing with Values Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web You Can’t Always Get What You Want

Morningstar Advisor - Spring 2007

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