Consider the following as a great example of why investors need to understand how their fund managers define value. Schneider Value (SCMLX) and Forester Value (FVALX) are both large-cap funds that fall into the value side of the Morningstar Style Box, but their performances over the past three years through June 2011 have been startlingly different. Schneider has lost 8.6%, landing in the category's basement, while Forester Value has gained 7.3%, making it a top category performer over the trailing time period.
What made the difference? Different definitions of value and different strategies. Arnie Schneider III, manager of Schneider Value, and his team use fundamental research to identify both struggling companies and industries in a rough patch. He often invests in companies going through management changes, strategy shifts, or cost cuts, and pays dirt-cheap valuations. That strategy has paid off in the past, but the fund's gutsy approach has also backfired at times. Owning--and adding to--the likes of Fannie Mae, Freddie Mac, and Countrywide during the market meltdown were among Schneider's worst moves.
Meanwhile, Tom Forester of Forester Value also looks for attractive valuations and scans for historically low P/E, price/cash flow, and price/book ratios as well as companies that pay dividends. Once he finds a cheap company, though, he will only buy if it has a solid balance sheet, good competitive position, and historical earnings per share and dividend growth. In 2008, Forester held a significant cash stake as he waited for bargains to appear, allowing him to beat the pack during the depths of the downturn.
On the flip side, during market rallies, Forester Value's conservatism can cause the fund to badly lag (and often it had ended up in the category's basement in bull markets). Schneider Value, on the other hand, can roar back during speculative market rallies, as its deeply out-of-favor names bounce back hard.
So, although both funds are value vehicles, the execution is vastly different, and can lead to strikingly different performance profiles. Thus, it is important to dig beyond the style box to truly understand how a fund is run and what kind of performance you may expect in different market environments.
Relative Value >>