Arnold Schneider's Schneider Capital Management 1st Quarter Shareholder Letter

Discussion of the quarter

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Apr 11, 2019
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Portfolio Objective

The Fund seeks long-term capital growth by investing primarily in common stocks of companies that have a market capitalization that are less than the largest company in the Russell 2000 Index and which Schneider Capital Management believes are undervalued.

Arnold C. Schneider III is primarily responsible for the day-to-day management of the Fund’s portfolio.

All investments contain risks and investors should consider the risks associated with investing in these types of Funds. Investments made in small capitalization companies are subject to a higher degree of market risk because they tend to be more volatile and less liquid when compared to larger more established companies.

We outperformed our index in the quarter as our stock selection was good. Credit spreads tightened while long term treasury yields declined. Equity markets retraced most of the fourth quarter panic selloff. Highly valued low growth defensive stocks finally slightly underperformed. However, cyclical stocks are still trading at a record low relative price/earnings ratio. Equity markets continue to price in moderate odds of a recession. Oil prices rebounded sharply in the quarter from their oversold year end levels, but the relative and absolute performance of energy indexes, while positive, lagged behind the commodity.

Outlook

International rig counts are still near the lowest levels of the past few years. 5 years of global underinvestment in oil should lead to declines in non OPEC, non U.S. production starting next year. The industry is replacing reserves at an all-time low level. Low prices entering the year will constrain domestic cash flow and result in a deceleration of U.S. shale supply growth, the growth engine of the world. Geopolitical risk increased in the quarter in 4 oil exporting countries: Columbia (increased pipeline sabotage from the ELN rebels and dissident FARC remnants), Algeria (massive protests over a presidential transition), Venezuela (dueling presidents and major blackouts) and Nigeria (disputed presidential and gubernatorial elections in oil producing states leading to threats of renewed pipeline sabotage).

International economic growth continued to slow, especially in China where capital continues to be misallocated toward the inefficient state-run companies. In response, China added further to its stimulus.

The U.S. held up better as easing financial conditions offset slowing non- oil exports. Worries about recession risks continued, usually based on inverted yield curve history. Inverted yield curves have a good, but not perfect, record of predicting recessions. Additionally, U.S. long term rates are not comparable to past cycles due to Quantitative Easing. Given zero long term sovereign yields in some major markets outside the U.S., domestic yields are much higher. In the past, U.S. yields were generally lower than global peers. This imbalance puts downward pressure on U.S. yields. The reason inverted yield curves were predictive in the past was because it indicated fed funds were in restrictive territory. Real short rates of about half a percent are well below inflation adjusted levels during past inversions. We believe our portfolio has substantial potential upside even in a modest economic growth scenario.

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Mutual Fund investing involves risk. Principle loss is possible.

Earnings growth is not representative of the fund’s future performance.

Value stocks may remain undervalued for extended periods of time and the market may not recognize the intrinsic value of these securities. There are no guarantees that any investment style will result in favorable performance over time. Investing in foreign securities poses additional market risks since political and economic events unique in a country or region will affect those markets and their issuers.

Portfolio Holdings are subject to Change. Discussions of Portfolio holdings should not be considered recommendations to buy or sell any security. Current and future portfolio holdings are subject to risk.

This update is being provided for informational purposes only. It is not intended as a recommendation or solicitation to purchase any security. Investors should consult with their Investment Professional about their particular investment program.