Arnold Schneider's small-company mutual fund went from best to worst after three of his mortgage-company holdings slumped 77 percent this...

Arnold Schneider’s small-company mutual fund went from best to worst after three of his mortgage-company holdings slumped 77 percent this year.

The Schneider Small Cap Value Fund had 13 percent of its $110 million in Anworth Mortgage Asset, American Home Mortgage Investment and Luminent Mortgage Capital, home-loan lenders battered by the deepest real-estate recession in 16 years.

Schneider, who oversees $6.2 billion in total, has produced average annual gains of 24 percent in his Small Cap fund during the past five years by purchasing shares of companies he finds undervalued.

The fund ranks first of 100 competing small-cap funds tracked by Bloomberg in the period. It dropped 15 percent so far this year, as of Aug. 28, placing last among those that purchase companies considered cheap when compared to financial yardsticks such as earnings growth.

“The fund has gotten killed,” said Karen Dolan, an analyst at Morningstar in Chicago. “It’s not unusual to see Arnie Schneider in an area of the market that’s risky and controversial, but this time he underestimated the risks.”

Overdue payments on subprime mortgages to people with poor credit rose to the highest since 2002 in the first quarter, according to data compiled by the Mortgage Bankers Association in Washington. That has led to bankruptcies among mortgage companies, including American Home, that were forced to pay back their lenders.

Schneider made his name by investing in companies with market values of less than $3 billion that other investors shunned.

He bought shares of Boykin Lodging, a real-estate investment trust that runs Marriott, Hilton and Radisson hotels, after the Sept. 11, 2001, attacks in the U.S. curbed travel.

The Cleveland-based company’s stock rose 65 percent in the next four years, twice the pace of the Standard & Poor’s 500 Index.

Schneider added shares of Houston-based Reliant Energy in 2003 when the largest electricity retailer in Texas was under investigation for alleged manipulation of energy prices.

The company admitted to sham trades, and some employees were indicted. Reliant emerged from the scandal, and the stock more than quadrupled over the next two years.

The Small Cap Value fund has a Sharpe ratio of 0.66, compared with 0.74 for rival funds, Morningstar reported. A higher Sharpe ratio reflects better risk-adjusted returns. It has Morningstar’s second-highest rating of four stars.

The fund had 4.8 percent of its assets in Anworth Mortgage, a REIT investor in mortgage-backed securities, at the end of June. The Santa Monica, Calif.-based company, the fund’s largest position, has said that it may have to sell most of the holdings in one unit because lenders want their money back.

Besides mortgage stocks, the Small Cap Value Fund has 4.7 percent of its assets in truck maker Navistar International, of Warrenville, Ill., and 2 percent in American Axle & Manufacturing Holdings of Detroit. Both were up sharply this year.

Schneider “has proven himself at understanding companies that are operating at troughlike levels, so I wouldn’t call it quits just yet,” Morningstar’s Dolan said.