Portfolio Manager Perspectives

Jeff Benjamin

Schneider surprise: Homebuilders, carmakers could be good bets

Don't look now, but these hammered industries may be headed for a rebound, says the famed value investor

Apr 23, 2010 @ 11:42 am

By Jeff Benjamin

Banks, homebuilders and automakers all look like opportunities to John Schneider, president and chief investment officer of JS Asset Management LLC.

“Deep value is what we do, and historically, now is a good time for this kind of strategy,” said Mr. Schneider, who has been hired to subadvise the new Highland All Cap Equity Value Fund Ticker:(HEVCX) for Highland Capital Management LP.

Highland Capital has $24 billion under management, $3 billion of which is managed for retail investors. But the newest Highland fund, which has attracted $13 million since its April 13 launch, represents the first time the firm has used an outside manager for a mutual fund.

Mr. Schneider, who manages $200 million through his own firm, was managing more than $10 billion under a similar value strategy in two mutual funds five years ago at Pacific Investment Management Co. LLC.

“Value is the only strategy that has proven to outperform the overall market over the long term,” he said.

It works, he added, “because we're looking at things that cause most people to have the initial reaction of ‘Why?'”

Consider banks, for example. “They've never been so well-capitalized,” he said.

Homebuilders are another area that a lot of investors continue to avoid simply because of the stigma of what helped cripple the financial markets a year ago.

“Just like the banks, homebuilders are well-capitalized,” Mr. Schneider said. “Over the past few years they haven't bought much land and they sold homes at break-even prices.”

The market meltdown also put half of all homebuilders out of business over the past two years, he said.

At the homebuilding peak a few years ago, the industry was building 2.2 million homes a year, which compares with a long-term average of 1.6 million.

Currently, the homebuilding industry is producing about 600,000 homes per year.

While the residential property market across the country is still over-capacity, Mr. Schneider said that problem might be solved within a year.

Supply and demand is also part of Mr. Schneider's case for automakers.

Over the past 14 months he said the auto industry has produced about 11 million cars and light trucks. Meanwhile, the “scrappage rate” — cars and trucks coming off the road — is 13.5 million.

“The aging of the fleet of cars on the road to such an extreme is already driving up the prices of used cars,” he said.

The basic premise of deep value investing is to not do the same thing that every other investor is doing, Mr. Schneider said.

“The idea is to go where others fear to tread,” he said. “And you have to do your homework.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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