Deep Value Strategy
Ariel Discovery Fund

Why Ariel’s deep value approach


Institutional neglect of companies at the smallest end of the capitalization spectrum leads to short-term inefficiencies and, therefore, long-term opportunities.

Research matters even more among the smallest companies

Since tiny companies are often ignored by Wall Street analysts, proprietary research becomes even more critical.

Good corporate governance heavily influences positive outcomes

Companies we buy must demonstrate significant and widespread share ownership; modest salaries with long-term incentive pay; modest, stock-skewed board compensation; and talented, independent and diverse directors.

Flexible valuation methods are essential when investing in very small companies

We employ a broad range of analytical tools, avoiding the blind spots that can result from rigid valuation methodologies.

Managing risk is a top priority

We define risk as the permanent loss of capital, which we mitigate by the large margin of safety (deep discount to intrinsic worth, fortress balance sheets and excess cash) we seek in the companies we buy.

Our portfolios offer a practical alternative to private equity

While our returns resemble those of private equity funds, our portfolios have greater liquidity, better transparency and lower fees.



Margin of Safety: Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.

Key Facts
Market Cap Range: under $2 billion
Inception:
Investor Class: 01/31/2011
Institutional Class: 12/30/2011
Number of holdings: 35-40
Turnover: 20-50%
Ticker Symbol:
Investor Class: ARDFX
Institutional Class: ADYIX
Fund Assets (all classes):
$55.7 million as of 06/30/2014
 
Portfolio Managers
Maley_David_web.png David M. Maley
Lead Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Portfolio Manager
 
Fund Spotlight
A closer look at Ariel Discovery Fund's investment strategy and process
 

Our deep value investment philosophy


Patience

We take the long-term view.
  • Three- to five-year time horizon enables us be opportunistic as short-term price dislocations arise
  • See market volatility as our friend, allowing us to buy at larger discounts and ultimately sell at larger premiums

Independence

We invest to our convictions, not to benchmarks.
  • By going against the grain, take advantage of the market's misperceptions of risk and exploit market inefficiencies
  • Remain benchmark agnostic as we build concentrated yet diversified portfolios

Expertise

We specialize in bottom-up, fundamental analysis.
  • Focus our long-term lens on the tiniest companies (which can trade at deep discounts) to uncover overlooked businesses that may present an asymmetric risk/reward opportunity
  • Evaluate corporate governance and insider ownership prior to valuation work
  • Utilize a valuation toolbox to measure the gap between stock price and intrinsic value

Teamwork

We work collaboratively with a shared commitment to excellence.
  • Draw on full team’s investment knowledge across capitalization ranges
  • Lead portfolio manager serves as special situations analyst, working alongside research team industry specialists; leveraging team insights, lead portfolio manager makes final decisions

 
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David Maley on
Deep Value Investing
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Our deep value process


Screening

Screen for overlooked stocks with very low prices to reduce downside risk
  • Process:
    Screen for size, valuation and financial strength, emphasizing corporate governance
  • Risk management:
    Seek companies selling at deep discounts to intrinsic worth
  • Benefit:
    Buying at such low prices substantially reduces downside risk

Bottom-up Research

Intensive, hands-on research capitalizes on institutional neglect
  • Process:
    Extensive valuation work and independent verification narrow list of ideas
  • Risk management:
    Use most suitable valuation metric when analyzing each company
  • Benefit:
    Helps us determine margin of safety (deep discount to intrinsic worth, fortress balance sheets and excess cash) between price and intrinsic value

Team Validation

Team review and debate bring additional expertise to bear
  • Process:
    Rigorous debate/discussion within research team
  • Risk management:
    Differing perspectives and backgrounds insures against groupthink
  • Benefit:
    Ideas vetted from multiple perspectives yield more informed decisions

Portfolio Construction

Concentrated portfolios constructed to drive superior returns with low volatility
  • Process:
    Build concentrated yet diversified portfolio
  • Risk management:
    Portfolio weightings reflect discounts and conviction levels; buy up to 6%, hold no more than 10% in any one security
  • Benefit:
    Long-term horizon lets us capitalize on an asymmetric risk/reward profile



Margin of Safety: Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.


Investor Class
Institutional Class
Quarter End
Month End
Ariel Discovery Fund

Performance

As of June 30, 2014
Inception date: January 31, 2011 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Since
Inception
Ariel Discovery Fund 2.83% -3.76% -4.39% 8.85% 11.84% 8.59%
Russell 2000® Value Index 4.42% 2.38% 4.20% 22.54% 14.65% 13.99%
S&P 500® Index 2.07% 5.23% 7.14% 24.61% 16.58% 15.63%
Ariel Discovery Fund

Performance

As of June 30, 2014
Inception date: January 31, 2011 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Since
Inception
Ariel Discovery Fund 2.83% -3.76% -4.39% 8.85% 11.84% 8.59%
Russell 2000® Value Index 4.42% 2.38% 4.20% 22.54% 14.65% 13.99%
S&P 500® Index 2.07% 5.23% 7.14% 24.61% 16.58% 15.63%
Expense Cap as of 2/1/14: 1.25%*
Net Expense Ratio as of the fiscal year ended 9/30/13: 1.50%*
Gross Expense Ratio as of the fiscal year ended 9/30/13: 2.90%*

*Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the “Expense Cap”) in order to limit Ariel Discovery Fund’s total annual operating expenses to 1.25% of net assets for the Investor Class through the end of the fiscal year ending September 30, 2016. Through January 31, 2014, the Expense Cap will continue to be 1.50% for the Investor Class.

Investing in small-cap stocks is more risky and volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of the market. It includes 500 blue chip, large cap stocks, which together represent about 75% of the total U.S. equities market.

Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current summary prospectus or full prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or click here. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC.

Ariel Discovery Fund

Sector Weightings (%)

As of June 30, 2014
  Ariel Discovery Fund Russell 2000 Value S&P 500
Technology 20.00 9.15 16.18
Financial Services 15.89 38.40 17.38
Consumer Discretionary 15.81 11.35 13.52
Producer Durables 12.77 14.20 10.73
Materials and Processing 11.36 5.82 3.90
Energy 11.23 6.60 10.89
Utilities 9.74 7.47 5.56
Health Care 3.20 4.85 13.16
Consumer Staples 0.00 2.15 8.38




Represents percentage of total equity holdings in the portfolio



Ariel Discovery Fund

Portfolio Characteristics

As of June 30, 2014
  Market Capitalization Ariel Discovery Fund Russell 2000 Value S&P 500
Market Capitalization (In billions)      
Large Capitalization 80.39 & Above 0 0 46
Medium/Large Capitalization 23.62 -- 80.39 0 0 32.7
Medium Capitalization 8.07 -- 23.62 0 0 18.7
Medium/Small Capitalization 3.24 -- 8.07 0 8 2.6
Small Capitalization 3.24 & Below 100 92 0
Dollar-Weighted Average (BIL)*   $0.41 $1.33 $69.52
Valuation Metrics  
Price/Book   1.4 1.6 2.7
Price/Sales   1.3 1.4 1.9
Trailing Price/Earnings   120.4 28.2 19.1
P/E Excluding Negative Earnings   32 20.1 18.6
Discount to Private Market Value   -31.2 n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth **   14.4 10.5 11
Portfolio Construction  
Debt/Equity   0.5 0.9 1.2
Number of Holdings   37 1,321 501
Turnover   35.3 n/a n/a
Historical R-Squared vs. S&P 500   0.7 n/a n/a
Historical R-Squared vs. Russell 2000 Value   0.8 n/a n/a



Market Capitalization data, Valuation Metrics, Fundamentals and Number of Holdings are obtained from BNY Mellon. Portfolio Turnover is generated internally through Fiserv APL.

*Market Capitalization is a dollar-weighted average natural log. Using the natural log of each stock’s market capitalization reduces the weight given to the largest companies in a simple averaging process.
**This measure is not a forecast of the fund’s performance.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of the market. It includes 500 blue chip, large cap stocks, which together represent about 75% of the total U.S. equities market.

Ariel Discovery Fund

Commentary

 
Monthly Commentary: Perspectives on the current market
Quarterly Report: Quarterly performance update and communication to investors
Fact Sheets: Quarterly overview of fund objectives and performance summary
Ariel Discovery Fund

Schedule of Holdings

As of July 22, 2014
Shares Security Description CUSIP Ticker Current Value ($) % of
Net
Assets
Top Ten Equity Holdings
73,154 Contango Oil & Gas Co. 21075N204 MCF 3,095,146 5.6
691,473 Cowen Group, Inc. 223622101 COWN 2,918,016 5.2
430,413 ORBCOMM, Inc. 68555P100 ORBC 2,836,422 5.1
1,378,900 Pendrell Corp. 70686R104 PCO 2,426,864 4.4
145,230 Erickson Air-Crane, Inc. 29482P100 EAC 2,359,987 4.2
68,500 International Speedway Corp. 460335201 ISCA 2,279,680 4.1
81,600 First American Financial Corp. 31847R102 FAF 2,267,664 4.1
860,994 Rentech, Inc. 760112102 RTK 2,229,974 4.0
170,999 Landec Corp. 514766104 LNDC 2,135,778 3.8
240,280 PCTEL, Inc. 69325Q105 PCTI 1,943,865 3.5
158,163 XO Group Inc. 983772104 XOXO 1,932,752 3.5
304,700 Century Casinos, Inc. 156492100 CNTY 1,764,213 3.2
1,646,788 Fixed Income Clearing Corporation 85748R009   1,646,788 3.0
164,455 Rosetta Stone Inc. 777780107 RST 1,598,503 2.9
70,600 Gulf Island Fabrication, Inc. 402307102 GIFI 1,519,312 2.7
92,100 AV Homes, Inc. 00234P102 AVHI 1,505,835 2.7
103,900 Mitcham Industries, Inc. 606501104 MIND 1,452,522 2.6
34,939 Team, Inc. 878155100 TISI 1,433,198 2.6
82,600 Oplink Communications, Inc. 68375Q403 OPLK 1,401,722 2.5
285,825 Spartan Motors Inc. 846819100 SPAR 1,297,646 2.3
368,800 Imation Corp. 45245A107 IMN 1,268,672 2.3
166,100 RealNetworks, Inc. 75605L708 RNWK 1,267,343 2.3
34,200 Capital Southwest Corp. 140501107 CSWC 1,231,542 2.2
143,100 POZEN Inc. 73941U102 POZN 1,192,023 2.1
104,400 Brooks Automation, Inc. 114340102 BRKS 1,124,388 2.0
28,100 Simpson Manufacturing Co., Inc. 829073105 SSD 1,021,716 1.8
46,800 Superior Industries Intl, Inc. 868168105 SUP 965,016 1.7
152,600 ARC Document Solutions, Inc. 00191G103 ARC 894,236 1.6
139,515 Telenav Inc. 879455103 TNAV 793,840 1.4
71,100 Multi-Fineline Electronix, Inc. 62541B101 MFLX 784,944 1.4
166,140 Sigma Designs, Inc. 826565103 SIGM 760,921 1.4
184,291 Orion Energy Systems, Inc. 686275108 OESX 750,064 1.4
24,400 MB Financial, Inc. 55264U108 MBFI 660,020 1.2
22,500 Brink's Co. 109696104 BCO 634,950 1.1
50,600 Furmanite Corp. 361086101 FRM 588,984 1.1
6,250 Littelfuse, Inc. 537008104 LFUS 580,937 1.0
67,400 FormFactor, Inc. 346375108 FORM 560,768 1.0
437,800 Vical Inc. 925602104 VICL 534,116 1.0
6/30/2014     0.0
Grand Total   $55,660,367 100.0%  

Past performance does not guarantee future results. © Ariel Investments, LLC. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC. Use of this website is subject to our Terms & Conditions of use. Each of the investment products, mutual funds or services referred to in this site may be offered only to persons in the United States. This web site should not be considered a solicitation or offering of any investment products, funds or services to investors outside the United States. Original illustrations © Omar Rayyan 2007.