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Trouble Is His Business


Fund manager John Schneider loves the unloved. So when he heard last spring that Tyson Foods (tsn) and other chicken producers were selling meat for 10 cents a pound to be burned as fuel, the head of the $54 million Touchstone Large Cap Value Fund got on the case.

The poultry producers' shares were getting pounded by bird flu fears and rising grain costs, but Schneider and his crew of three analysts concluded the industry could easily rebound by cutting production--and that's just what happened. Tyson stock is up 61% in the past year, and he still owns the stock.

A look at Schneider's fund reveals just how much of a contrarian he is. Four of his top five holdings are in the home mortgage business, including Fannie Mae (FNM) and Washington Mutual (WM). Other major positions include troubled cell-phone carrier Sprint Nextel (S), struggling telecom equipment maker Alcatel-Lucent (ALU), and Dell (DELL), the computer maker suffering through a spate of well-publicized missteps that forced founder Michael Dell to take back the reins in January.

The Touchstone portfolio is up 20% since Schneider took over in March, 2006, matching the Standard & Poor's 500-stock index. Long-term, his record is impressive. He ran PIMCOPEA Renaissance Fund from 1999 through 2005, gaining an average of 12% a year, which beat 99% of midcap value funds, according to Morningstar (MORN).

To achieve results like that, you have to harness the power of contrarian thinking. For instance, Schneider started to investigate power companies during the post-Enron bankruptcies of Calpine and Mirant (MIR). He uncovered an opportunity in Reliant Energy (RRI), which was tarred by the others' troubles. He determined that the company was unlikely to go bankrupt, yet its shares were selling for about one-fifth the cost of its plants. The stock has since quadrupled.

NO HARD-AND-FAST RULES

All 35 stocks in the Touchstone fund were picked using Schneider's unusual investment process. He and his team keep tabs on a frequently updated list of about 400 stocks, but there are no absolute requirements, no minimum price-earnings ratio or price-to-book value that gets one stock on or off the list.

A lot of the Touchstone team's ideas come from looking at the suppliers and customers of current favorites. Interest in Tyson led Schneider to Gold Kist (PPC), another poultry processor since acquired by Pilgrim's Pride. "We're looking for areas under duress but where there's a specific catalyst that's going to make things less undervalued," he says.

Schneider, who grew up in the Philadelphia suburbs, followed his older brother Arnold into the money-manage-ment business after earning a finance degree at Lehigh University. Both caught the stock bug as youngsters from their father, who was an engineer by trade but an active investor on his own behalf. When Arnold left the blue-chip Boston money manager Wellington Management in 1996 to start Schneider Capital Management, John joined him.

He got his own fund three years later when PIMCO Equity Advisors hired him to run two value funds that eventually totaled $12 billion. He went out on his own in 2005 and won the Touchstone job in March, 2006. Todd Trubey, who covers the fund for Morningstar, says Schneider's biggest strength may be his courage. "Many shy away from firms that seem to be troubled," Trubey says. "Schneider can look through temporary problems."

By Aaron Pressman


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