By Brian Blackstone
IS TOPEKA, KAN., THE NEW OMAHA? NOT YET -- but if its leading portfolio manager, Jim Schier, extends his impressive decadelong performance much longer, the Nebraska city may have to cede its place as the center of the value-investing universe. Mixing quantitative tools with a subjective read on a company's underlying competitive strengths, Schier's $824 million Rydex/SGI Mid Cap Value Fund (ticker: SEVAX) was up 17.29% this year through June 11; that's 7.42 percentage points above its peers, and 11.33 points above the Standard & Poor's 500.
That's already helped to claw back a big chunk of Schier's 27% loss in 2008. Nonetheless, he performed about 10 percentage points better than other funds in his category last year -- a reminder that long-term performance is as much about limiting losses in downturns as it is about beating the pack when times are good.
Schier's mid-cap value fund has a five-star rating from Morningstar. Its A-class shares carry a 5.75% front load, and a 1.37% expense ratio, and the fund has averaged a 10.49% annual return over the past decade versus its peers' 3.76%. (Yet Schier still has a way to go to match Sage of Omaha Warren Buffett's long-term returns.)
THESE ARE MUDDLED TIMES when it comes to distinguishing between value and growth, the 51-year-old Schier admits. Still, philosophical lines remain. A growth investor wants to believe that the markets are right, Schier says, and value investors like him want to think the others are wrong -- and "find that inefficiency," for profit.
An example: Hanover Insurance Group /zigman2/quotes/204392149/composite THG +0.09% (THG), a holding that Schier has added to this year. What caught Schier's eye when he bought the shares in 2006 was Hanover's move out of life insurance, in order to focus on property and casualty insurance. He also likes Hanover's mix of statistical pricing methods usually seen in bigger insurers with the high-quality-service-oriented nature of smaller, regional insurers. The market inefficiency? Schier thinks high-quality insurers have fallen off the radar screen this year, as investors rushed to participate in the bank-stock rally.
"I don't think it's a stretch for this thing to be in the mid-40s," Schier says; Hanover now trades around 37. (For more on Hanover, see our story, "Where Profits Are a Policy.") THG carries a 2009 multiple just above 10.
Schier's quantitative work focuses on pretax return on invested capital, and profits relative to debt-adjusted price to book. If a company meets the Schier team's initial valuation threshold, Schier then asks one of his five fundamental analysts, each with a sector specialization, to do a short stretch of further research to strip out "dead wood." If Schier still likes the stock, the analyst reviews it in depth, putting a finer estimate on valuation, downside risks and competitive position. Then Schier decides if it makes the final cut.
Another favorite is Computer Sciences (CSC), a business- and technology-service and outsourcing outfit. Schier figures that the company's extensive government contracts, including those with the U.K.'s national-health service, cushion it against the economic downturn and position it well to profit from any health-care overhaul in the U.S. CSC's full-current-year (ending March 2010) earnings per share are seen at $4.18. "It's good at keeping governments happy in very mission-critical services," Schier says, while still being able to benefit from a cyclical upswing in the economy. The stock now trades at about 44; Schier thinks it should be in the mid-50s.
He's also bought electric utilities in recent weeks, including Allete /zigman2/quotes/205250527/composite ALE -1.08% (ALE) and NorthWestern Energy /zigman2/quotes/208537368/composite NWE -1.43% (NWE). The two trade at a discount to other utilities based on his valuation metrics. Schier likes their opportunities for building transmission lines to connect wind farms to the interstate grid. Such projects are usually regulated by the Federal Energy Regulatory Commission, which tends to offer a more favorable regulatory environment for investors than do state commissions, he says.
Schier's bottom-up style paid huge dividends with retailer Chico's FAS /zigman2/quotes/203348060/composite CHS -2.31% (CHS), which is up by 143% this year. Schier was drawn to the strong brand name, loyal customers and "deep" discount on the shares when he started buying them last autumn, at times for less than $2 per share. "In the downdraft, a lot of guys bailed," he says. It now trades at about 10.
Except for Buffett's Omaha, the middle of the plains might not seem a likely hotbed for top-notch value investors. But Schier thinks his location lends perspective. For one thing, there's less chance of getting enamored of any one sector that might be driving growth in a particular region. And Topeka wasn't hit as hard as other regions by the housing bubble; that helped Schier stay focused on intrinsic value.
Schier got an undergraduate degree from Notre Dame, in Indiana, and a master's degree in business administration from Washington University in St. Louis in 1982 -- where the late John Bowyer got Schier interested in value investing. Schier worked at Stifel Financial before shifting to the buy side and moving to Kansas in the late '80s. He joined Security Global Investors in 1995, and has managed the Ryder mid-cap value fund since its inception in 1997. He also runs Rydex/SGI Small-Cap Value (SSUAX) and co-manages the Rydex/SGI All-Cap Value (SESAX).
Schier leaves to others the alphabet-soup debates over the shape of the eventual recovery (V, U, L or even W). "I don't think I've ever made money off a macro[economic] forecast," he admits. Instead, he looks for stocks that can be steady growers in bad times as well as good. That proclivity was particularly helpful in weathering the 2008 collapse with the likes of utilities, packaging and consumer staples.
When pressed, Schier admits that he's in the "U"-shaped-recovery camp, figuring that if the U.S. brings debt levels back to prudent levels, that implies a big hit to gross domestic product. And he does worry about the mountain of supply capital markets will have to digest -- not only from the government, but from financial institutions and private-equity firms. If the velocity of money picks up again, that could lead to inflation and a tricky balancing act for the Federal Reserve. "I'd be shocked if we don't have some re-emergence of bad news," he says.
Meanwhile, Schier may work in a place that big-city dwellers call fly-over country -- but he's content to leave to others the view from 30,000 feet.
BRIAN BLACKSTONE is a special writer for Dow Jones Newswires in Washington.