James P. Schier's Security Mid Cap Value Fund may outperform the stock market for an eighth straight year, helped by gains in Shaw Group Inc. and McDermott International Inc. after Hurricane Katrina.
Shares of the Louisiana-based engineering companies rose after Katrina caused an estimated $100 billion in damage on the Gulf Coast. Schier said he has held the stocks for as long as five years because he expected them to get a lift from increased industrial and public infrastructure investment.
"We did have things that benefited from the mess down there and the need to build up," Schier, 47, said in an interview from Security Benefit Group's office in Topeka, Kan.
His $526 million fund rose at an annual rate of 27.8 percent in the past three years, placing third among 54 competing funds tracked by Bloomberg. The top performer was the RS Value Fund, up 34.5 percent a year. The funds invest in companies with market values of $5 billion to $25 billion that tend to have low price-to-earnings ratios.
Schier's fund has outpaced the Russell 2000 Index every year since 1998 and is exceeding the index by 5.2 percentage points this year.
The fund's name may be considered a misnomer since about half of its assets are invested in smaller-company stocks, said Greg Carlson, an analyst at Morningstar Inc., the Chicago research firm. The fund also "straddles the line" between value and "blend" funds, which invest in some companies with faster growth characteristics, Carlson said.
The fund has the flexibility to invest in a mix of stocks, and it "tilts to the sectors that seem to be offering us more opportunity," Schier said.
Schier, who holds degrees from the University of Notre Dame in South Bend, Ind., and Washington University in St. Louis, has managed the fund since it opened in May 1997. He uses statistical analysis and company-specific research to identify low-priced stocks. He said he seeks companies capable of improving their returns on capital over three to five years.
"I'd be hard-pressed to believe that those areas that the portfolio is geared to have only one good month behind them," Schier said.
He made an early commitment to energy-related companies, establishing a position in 1999 when oil closed at $25.60 a barrel. It now trades at about $65. The fund had 22 percent of its assets in the sector at the end of August, almost triple the 8 percent held by the average small-company blend fund, according to Morningstar.
"It was a smart decision to get into the sector," Carlson said. "That's been a very good call."
Schier's energy holdings include Arch Coal Inc. of St. Louis, the second-largest U.S. coal producer, which has gained 79 percent this year, and Murphy Oil Corp., based in El Dorado, Ark., up 25 percent. Murphy's stock ended the week at $49.20, while Arch shares closed Friday at $67.23.
Murphy Oil has said its refinery east of New Orleans, which has a 125,000-barrel-a-day capacity, may be shut for months because of some flooding, although it apparently did not sustain major damage.
Storm-related costs for refining companies, including Murphy Oil, "should be more than offset by higher prices," said Justin Perucki, a Morningstar analyst. After Katrina, the average per-gallon cost of gasoline rose to its highest inflation-adjusted level in 24 years.
Schier declined to discuss recent stock trades in detail. He said he cut by 50 percent his investment in one company that recently jumped in value.
Shares of Shaw Group, the fund's biggest holding at midyear, have gained about 37 percent since Katrina struck on Aug. 29. Before the storm, shares of the Baton Rouge company were down 9.3 percent for the year, as lower government outlays for environmental cleanup work led to lower forecasts for earnings in the fiscal fourth quarter ended Aug. 31.
Shaw Group was awarded a $100 million contract last week from the Federal Emergency Management Agency to help house evacuees and another from the U.S. Army Corps of Engineers to pump water out of New Orleans. The engineering company's shares ended the week at $21.90.
The company's stock slumped in the first two trading days this week after congressional Democrats and Louisiana officials criticized FEMA's distribution of contracts. Shaw Group is a client of consulting firm Allbaugh Co., led by former FEMA director Joseph M. Allbaugh.
Shares of New Orleans-based McDermott, which provides services to energy companies and utilities, have climbed 80 percent this year. The stock jumped 27 percent on Aug. 30, a day after the hurricane and the company's announcement of a $2.06 billion settlement that should resolve asbestos claims pending in the bankruptcy case of its Babcock & Wilcox unit. Its shares closed Friday at $33.44.
McDermott is Security Mid Cap Value's No. 9 holding. Analysts expect demand to rise for its services, which include building and repairing offshore oil and gas rigs. About 250 Gulf Coast platforms were damaged or abandoned in the storm.