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Fund Spy

How Schneider Overcame the Devil's Advocate

We put Analyst Picks Schneider Value and Schneider Small Cap Value through the wringer.

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Arnie Schneider, portfolio manager of  Schneider Value (SCMLX) and  Schneider Small Cap Value (SCMVX), made some major mistakes during the recent market swoon. He not only held several financial and mortgage firms that ended up going belly up or have otherwise been impaired, such as Countrywide,  Fannie Mae (FNM),  Freddie Mac (FRE), and  American International Group (AIG), but also he continued to buy them as they plummeted. At Schneider Small Cap Value, he was caught holding the bag with some other distressed stocks, such as Pilgrim's Pride, a chicken producer that went bankrupt under a mountain of debt, and American Home Mortgage--the first subprime lender to go belly up.

The results were horrific. Between Oct. 9, 2007, and March 9, 2009, (the most recent closing peak and trough for the S&P 500 Index), Schneider Value lost 70.8%. Schneider Small Cap Value dropped 69.2%.

Although this sad story isn't unheard of when the S&P 500 Index itself fell 54.9% during that time, the Schneider funds were our worst-performing Analyst Picks. We knew when we made the funds picks that their deep-value approaches carried special risks associated with companies going through hard times--even bankruptcy--but we were confident in Schneider's ability to separate the winners from the losers, given his experience and performance while at Wellington Management Company. We knew that there would be periods of weakness, and we were comfortable with the ups and downs of the funds' performance records, because we'd seen Schneider's approach work well over the long haul. Nonetheless, we were disappointed by the exaggerated losses this time around.

Bridget B. Hughes does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.