"At Snow Capital, value investing is prudent investing."Â –Â Richard A. Snow
Richard Snow (Trades, Portfolio) became a professional investor relatively early; while in his 20s he was tapped by his family to invest the proceeds from selling their businesses. He went on to not only do well by his family but also attracted the attention of other wealthy investors.
He’s managed his own firm since 1980 and has done well enough to earn guru status. Yet for the past six years he has lagged both the Standard & Poor's 500 and his biggest fund’s category average.
Apparent missteps in 2008, 2011 and 2015 negatively compounded his lagging results. Will early results from 2017 continue and vault him back into a leadership position?
Who is Snow?
The guru launched R.A.S. Capital Management in 1980 while he was still in his 20s. Previously he had earned a B.A. from Duquesne University and a finance M.B.A. from the University of Pittsburgh.
In starting his company, Snow was investing his family’s assets after they sold several businesses. Other high net worth individuals heard about Snow’s success with his family’s investments and asked him to invest their money as well.
R.A.S. was restructured into a partnership structure in 2001 and renamed Snow Capital Management LP. He says this allowed him to attract and retain other investment professionals. The firm is now described as employee owned.
His LinkedIn profile says, “Over the years, he developed a philosophy and process that attempted to preserve capital and realize long-term appreciation by selecting securities with attractive risk/reward attributes.”
Biography based on information at the Snow Capital Management website and LinkedIn.
Snow had the good fortune to be launched into the investing world with a weighty amount of capital. At the same time, it must have seemed a huge responsibility for a young man in his 20s.
What is Snow Capital Management?
On its website, the firm describes itself this way:
- Boutique investment manager.
- Several value strategies available in multiple formats.
- Contrarian, fundamental, relative value investment philosophy.
Further, it explains that attractive returns can be generated through “diversified portfolios of well-managed, financially strong companies where the stock price is depressed because the company [sic] has experienced short- to intermediate-term difficulties.”
In its Form ADV Part 2A, the firm reports that it managed some $4.5 billion of regulatory assets at the end of calendar 2016:
In addition, it reports operating four publicly traded mutual funds under the umbrella of Snow Capital Family of Funds (numerical data from Google Finance):
- Snow Capital Opportunity Fund (SNOCX): $201 million.
- Snow Capital Small Cap Value Fund (SNWCX): $41.8 million.
- Snow Capital Focused Value Fund (SFOAX): $1.8 million front.
- Snow Capital Dividend Plus Fund (SDPAX): $3.29 million.
The first two funds have a back load of 1% while the third and fourth have 5.25% front loads (front load refers to fees taken from the investor before investing begins, and back load refers to fees taken when a client withdraws cash from a fund). Funds with a front load also incur a 1.20% management fee while those with a back load incur a fee of 2.29%.
Bloomberg reports, on an undated web page, that the Snow Capital All Cap Fund (SNAVX) has been liquidated. The last update posted at Google Finance was on May 14. At that time it was showing a negative 9.45% return for one year and a positive 8.85% for year to date.
Each of these funds is also available in an institutional class.
The firm serves several groups of clients:
- Individuals.
- High net worth individuals.
- Investment companies, including mutual funds.
- Pooled investment vehicles, such as hedge funds.
- Pension and profit-sharing plans.
- Charitable organizations.
- Corporations or other businesses not listed above.
- State and municipal government entities.
Mutual funds available to the public make up a small fraction of the firm’s more than $4.5 billion of assets. With such high fees, it seems unlikely the funds will be widely popular.
Snow’s investing philosophy
Snow’s firm sums up its investing philosophy on its website this way: “Our philosophy is consistent with modern behavioral finance research.”
Note, the philosophy is "not" behavioral finance but "consistent with."Â This suggests Snow and his crew have developed their own interpretation of behavioral finance, something that varies from the core belief that individual investors get too optimistic when the market is booming and jump in just before the market peaks. And when the markets are headed down, investors get too pessimistic and sell out near the bottom.
They go on to say they take advantage of overreactions to negative surprises and avoid paying too much for the “crowd’s current favorites.” That’s also known as a contrarian strategy.
They state they use this philosophy and process in all their investment portfolios.
Moving on to that process, it involves the use of fundamental analysis. Snow wants firms that are undervalued, well managed and financially strong – with a depressed stock price because of temporary difficulties. Then, they wait for a dissipation of the negative surprise or for a company problem to be corrected by management.
Regarding risk, they say in the Form ADV Part 2A, “We believe the professional and disciplined execution of our investment philosophy will generate sustainable investment returns for our client accounts over time.” Note that last phrase, “over time,” which underlines a value strategy and provides an escape from short-term accountability.
Snow and his colleagues are contrarian investors, looking for what the herd overlooks. They wait for the crowd to make a bad call on a good company that is underpriced because of temporary negative issues. Beyond that, it uses relatively conventional fundamentals to distinguish among candidates.
Snow’s holdings
Snow Capital’s main interest, at the end of the second quarter, was in Financials. The following GuruFocus chart shows all sectors in which Snow had a position:
That preference shows up in the list of top 10 holdings, provided by Yahoo! Finance:
Two big financial companies sit atop the top 10 list and –Â interestingly for a mutual fund advised by a guru –Â a major index ETF, the iShares Russell 2000 ETF.
Snow’s performance
As this chart shows, Snow’s performance with the Opportunity Fund has lagged the S&P 500 (green line) and its category (orange line) for much of the past decade:
And this table shows how investors have fared –Â quite well in the past year if nothing else:
The other funds listed above have shown middling results for the past three- and five-year periods (none has yet reached the 10-year mark).
Finally, some good news for those who hold the Opportunity Fund: Their funds have had strong returns in the past year but not yet enough to make whole the investors who bought in at most points during the past decade.
Conclusion
Snow invests as one would expect a value investor to invest –Â by buying good companies at bargain prices.
In his case, his preferred strategy is to wait for the market, the crowd, to overreact to bad news that should have only a temporary effect. Then it’s a matter of waiting for the market to recognize its mistake and bid the price back up again. Selecting the right companies among those that trade a discount comes down to fundamental research.
Which would all be fine, except that it failed fund holders in the 2008, 2011 and 2015 downturns. Snow nearly kept up with the S&P 500 and category averages in 2008, when they, too, plummeted. But those benchmarks fared better in 2015 and left Snow behind. Quite simply, he did not preserve fund holders’ capital well.
Will he catch up with them? It seems the Snow Capital team has done well so far this year, but investors aren’t likely to see much improvement, given the front- and back-load fees as well as hefty management expenses on the back loads. It will take double-digit returns for a few years to make investors happy.
Not all is well in the philosophy or processes espoused by Snow and his team; value investing has not been prudent investing.
