A Fund That Rides the Cycles
By James Anderson
John Schneider has spent much of 2001 turning rust into gold. As portfolio manager of the PIMCO Renaissance Fund (PQNBX ), Schneider has made major gains with some metal-bound Old Economy stock picks, including neglected favorites from sectors as passé as steel and truck manufacturing. By coupling those out-of-the-limelight, Rust Belt staples with a sampling of shares from bruised industries such as semiconductor equipment, Schneider made out very well indeed in 2001.
Through Dec. 28, Schneider's work has produced a 19.2% total return for 2001, 30.2 points higher than the Standard & Poor's 500-stock index has managed. Schneider, who took over the value-oriented fund in 1999, has kept its sterling record intact. Over the three-year period ended last Thursday, the fund's 21.7 average annual return has earned him a spot on BusinessWeek's A-list of high-return, low-risk funds, and places him ahead of 90% of the mid-cap value funds covered by Morningstar. The last five years, PIMCO portfolio, which was launched in 1995, has averaged 21.3% annual returns, again earning it a place in the top 5% of funds in the category.
Schneider, an avowed value investor, starts assembling his portfolio from what he calls a "monitor" list. On it are approximately 400 companies that he has grown familiar with in his 15 years in money management, including stints at Wilmington Capital Management, Newbold Asset Management, and later his own firm. He sees the list as a scorecard of sorts, one where he can check companies' share prices and earnings as he's making portfolio decisions.
PEAKS AND TROUGHS.
"To be frank, there's no magic in what we do. We tend to have one or two companies we keep an eye on in a wide variety of industries," he says. "Sometimes we find the stocks themselves are worth checking out. Other times we'll find circumstances to be favorable enough to make us want to examine as many stocks as we can in the sector."
His forte could well be snatching up the stocks of cyclical companies whose earnings -- and share prices -- climb and fall alongside the economy's fortunes. Schneider says his approach to cyclical sectors, spanning everything from auto parts to computer chip equipment, is quite simple. Whether he's looking at aluminum pressers or oil-drilling operations, he'll scan the company's earnings over the past five years, looking for peaks and troughs. He then sets about determining a corporation's "normalized" earnings, a fancy way of saying profits at a midway point somewhere between its cycle boom and bust.
While he's at it, Schneider then calculates a median price-earnings ratio of sorts. Then, it's just a matter of simple multiplication -- the product of his normalized earnings figure and the fund manager's p-e estimate -- to come up with a price target.
HUNTING FOR CATALYSTS.
Once he has determined that a company's shares look intriguing in relation to his price target, Schneider and a team of three analysts then try to determine what triggers, if any, might help raise a stock's price from its current level back to the fund manager's target. "It's easy to find a reason for a depressed stock price. It's a bit harder to come up with a catalyst or something that's going to help a stock rebound," he admits.
That's what happened early in 2000. Schneider was making the rounds when he noticed a few interesting changes in Chubb (CB ) and St. Paul (SPC ), insurance companies on his monitor list that had barely stayed on the fund's radar. "Those two companies had been on our lists for many years, but right then, we started to see the industry gain pricing power, a factor that made those two companies attractive for us," recalls Schneider, who then got to work, took a stake, and then saw Chubb and St. Paul post gains of 56.7% and 65.6%, respectively, last year.
By looking further into the industry and seeing reasons for an overall resurgence, Schneider got in on other insurers, including the property/casualty firm ACE (ACE ), and reinsurer PartnerRe (PRE ). The group went on a roll in 2000, and helped the fund to a 36.7% return that year.
He doesn't limit himself to industrial opportunities, however. Case in point: Kulicke & Soffa Industries (KLIC ), which specializes in semiconductor equipment, and Micron Technology (MU ), a memory-chip maker. The tech sector was soft earlier this year, so Schneider got in on these stocks, which he thought would bounce back nicely once computer chipmakers began to restock for the next upward cycle. Another catalyst he considered was the fact that chip stocks are expected to climb next year in anticipation of an economic recovery.
Plus, both of these stocks looked cheap for much of the year. Kulicke & Soffa fell 47.1% in 2000, while Micron backtracked some 9.1% over the year. Now, both stocks are starting to stir. Year-to-date, as of the Dec. 28 close, Kulicke & Soffa has produced a rousing 58.7% gain. While Micron is still off 10.8% for the year to Dec. 28, it has risen 16.6% in the past 30 days, and 68.1% over the three-month period ended last Friday.
Though he leans toward value investing, Schneider's approach doesn't always lend itself to a Warren Buffett-style portfolio of stocks allowed to slowly appreciate. When a stock begins to near the fund's target price, Schneider starts to trim his position. That's why his portfolio turnover runs about 138% a year, compared to the quicksilver 99% portfolio shuffling of the average mid-cap-value fund, according to Morningstar. "We like to look at selling a particular position as something we do gradually -- more like a dimmer than an 'on-off' switch," he says.
A SHINE TO STEEL.
Schneider isn't timid in taking stakes in companies he likes, though. PIMCO's portfolio has carried weightings of close to 8% of the funds assets in ACE this year, and Schneider regularly lets positions rise to 5% or so of the fund's money. "He's not afraid to bet on his picks," notes Morningstar analyst Brian Portnoy, who points out that PIMCO Renaissance typically has 40% to 50% of its assets riding on its top 10 holdings. Morningstar stats show that the fund's peers in the Chicago research firm's mid-cap value category have around 35% anchored in their top 10.
A stock Schneider likes right now is steelmaker Nucor (NUE ), despite the industry's well-documented woes. Demand for flat-rolled steel has plummeted in a sleepwalking economy, and industry bankruptcies have been rampant, including mostly recently, LTV (LTV ). Things have gotten so bad that big steel has come to Washington asking for tariffs or quotas to be implemented to ease the sector's current plight.
Still, Schneider says Nucor has distinguished itself in a couple of ways. Management has run a tight operation and maintained a clean balance sheet throughout the downturn. Second, Nucor has plucked additional capacity from its distressed competitors. "In one case, the company picked up a nonunion plant from LTV that was less than 10 years old, all for just around 30 cents on the dollar," says Schneider.
HOPING FOR COLD.
Those two factors should set Nucor up for a nice bounceback in the event of an economic recovery, says Schneider who believes the company could eventually see its stock climb to $65 a share in the next 12 to 18 months. The stock closed at $52.76 on Dec. 28.
Schneider is collecting a new crop of unloved stocks for the new year. "We're picking up a lot of cyclicals, such as basic materials and aluminum, and even some energy plays like Diamond Offshore Drilling (DO )," he says, naming one stock he's particularly fond of. "Natural gas prices are low, and the stock is down for the year. But we think any number of factors -- a cold [snap] for instance -- could cause a squeeze and make investors take notice," he says.
Whatever happens with the weather, you can't help but feel that Schneider's alchemy will add some more gleam to his portfolio.
Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BusinessWeek Online
Edited by Patricia O'Connell