Quick Take: Jim Schier takes broad approach to value investing. As manager of the $219-million Security Mid-Cap Value Fund/A (SEVAX), he uses both qualitative and quantitative criteria to uncover companies whose profits, he believes, will be significantly higher in five years than what is currently reflected in their stock prices.
Along with mid-cap stocks, the manager also invests in small caps. The fund currently has a median market cap of $2 billion. At present, Schier believes large- and mid-cap value stocks are basically fully valued, while small-cap stocks are trading at about a 5% discount to mid caps.
Schier searches for stocks from the bottom-up, but also considers top-down criteria. Currently, he thinks the technology, materials, and industrials sectors offer the best value. He's underweighted in financial services, although he's been recently buying in that sector as well.
The Security fund has outperformed its mid-cap value peers since its inception in May 1997. For the five years through last month, it gained 15.0%, on average, versus 9.8% for the average mid-cap value fund. However, the fund has been more volatile than its peers. The areas of the market where Schier finds the best opportunities can be more volatile.
The fund's expenses currently run higher than its peers, 1.65% versus 1.43% for the average mid-cap value fund. That's because the average account size has fallen due to market declines, notes Jana Selley, director of investor relations at Security Benefit. The fund's expenses should fall as the market improves.
The Full Interview:
S&P: What types of stocks do you look for?
SCHIER: We try to identify companies that will be significantly more profitable in three to five years, buying them at prices that reflect much lower profit levels. We keep the fund's turnover low to capture as much of the stock appreciation as possible. We will wait until opportunities develop so that we can buy stocks when people want to sell.
S&P: Why do your favor small- and mid-cap stocks?
SCHIER: They provide a wider range in which to roam. The fund's median market cap is currently about $2 billion. By prospectus, we are required to have about 80% of our assets in stocks with markets caps of $336 million to $12.8 billion. Our current analysis of value stocks says large- and mid-cap stocks are basically fully valued, and small-cap stocks are probably at a 5% discount to mid-cap stocks.
S&P: How do you select stocks?
SCHIER: We evaluate companies by comparing their pre-tax returns on capital with their stocks' debt-adjusted price to book. We try to decide an appropriate price to pay for a given level of profitability. Our process is about 50% quantitative and 50% qualitative. The quantitative side tells us how stocks are priced and how profits compare historically. The qualitative side helps to assess what the future is like.
S&P: Do the stocks that are undergoing difficulties generally offer the best opportunities?
