| Current Price: | $10.15 as of 07/25/08 |
| Daily Change: | -0.02 -0.20% |
| YTD Return: | -7.56% |
The Value of a $10,000 Investment as of March 31, 2008
| Ticker Symbol: | ARFFX |
| CUSIP: | 04035F107 |
| Ariel Mutual Fund #: | 2222 |
| Total Net Assets: | $38.7 million as of 6/30/2008 |
| Net Expense Ratio: | 1.25% (as of 9/30/07) |
| Gross Expense Ratio: | 1.63%* (as of 9/30/07) |
| Investment Minimum: | $1,000 initial; $50 subsequent; waived min. with automatic investment program |
| Sales Charge: | None |
*Ariel Investments, LLC, the Adviser to the Funds, is contractually obligated to waive fees or reimburse expenses in order to limit Ariel Focus Fund's total annual operating expenses to 1.25% of net assets through the end of the fiscal year ending September 30, 2009. After that date, there is no assurance that such expenses will be limited.
Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.
Investing in mid-cap stocks is more risky and volatile than investing in large cap stocks
ANNOUNCEMENTS
PORTFOLIO MANAGERS
INVESTMENT OBJECTIVE
CATEGORY
INVESTMENT STYLE
INCEPTION DATE
FUND DOCUMENTS
FUND RANKINGS
Ariel Focus Fund Performance as of June 30, 2008
| Inception date: June 30, 2005 | Annualized | |||||||
| One Month | Three Months | Year To Date | One Year | Three Years | Five Years | Ten Years | Since Inception | |
|---|---|---|---|---|---|---|---|---|
| Ariel Focus Fund | -9.14% | -3.74% | -8.56% | -15.48% | 1.67% | N/A | N/A | 1.67% |
| Russell 1000 Value Index | -9.57% | -5.32% | -13.57% | -18.78% | 3.53% | 8.92% | 4.91% | 3.30% |
| Russell 1000 Index | -8.31% | -1.89% | -11.20% | -12.36% | 4.81% | 8.22% | 3.38% | 4.58% |
| S&P 500 Index | -8.43% | -2.73% | -11.91% | -13.12% | 4.41% | 7.58% | 2.88% | 4.15% |
Ariel Focus Fund Performance as of March 31, 2008
| Inception date: June 30, 2005 | Annualized | |||||||
| One Month | Three Months | Year To Date | One Year | Three Years | Five Years | Ten Years | Since Inception | |
|---|---|---|---|---|---|---|---|---|
| Ariel Focus Fund | 0.10% | -5.01% | -5.01% | -6.45% | N/A | N/A | N/A | 3.24% |
| Russell 1000 Value Index | -0.75% | -8.72% | -8.72% | -9.99% | 6.01% | 13.68% | 5.54% | 5.68% |
| Russell 1000 Index | -0.68% | -9.48% | -9.48% | -5.40% | 6.19% | 11.86% | 3.83% | 5.73% |
| S&P 500 Index | -0.43% | -9.44% | -9.44% | -5.08% | 5.85% | 11.32% | 3.50% | 5.59% |
| Net Expense Ratio (as of 9/30/07): | 1.25% |
| Gross Expense Ratio (as of 9/30/07): | 1.63%* |
Assumes reinvestment of dividends and capital gains.
*Ariel Investments, LLC, the Adviser to the Funds, is contractually obligated to waive fees or reimburse expenses in order to limit Ariel Focus Fund's total annual operating expenses to 1.25% of net assets through the end of the fiscal year ending September 30, 2009. After that date, there is no assurance that such expenses will be limited.
Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.
Performance data quoted represents past performance. All performance assumes the reinvestment of dividends and capital gains. Past performance does not guarantee future results. 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 1000® Value Index measures the performance of large-sized, value-oriented companies with lower price-to-earnings ratios.
The Russell 1000® Index is composed of the largest 1000 stocks in the Russell 3000 index which represents approximately 98% of the U.S. equity market. As of June 30, 2006 this index has an average market capitalization of $34.7 billion based on a dollar-weighting of all holdings.
The Standard & Poor's 500 Index is a broad market weighted index dominated by blue-chip stocks.
For a current prospectus, which includes the investment objectives, risks, management fees, charges and expenses as well as other information, call 800-292-7435. Please read the prospectus and consider this information carefully before investing. ©2007, Ariel Distributors, LLC.
The Value of a $10,000 Investment as of March 31, 2008
Top Ten Equity Holdings as of June 30, 2008
| SECURITY DESCRIPTION | % of Net Assets | |
|---|---|---|
| 1. | Toyota Motor Corp., ADR | 6.7 |
| 2. | International Business Machines Corp. | 6.6 |
| 3. | Accenture Ltd, Class A | 6.1 |
| 4. | Dell Inc. | 5.8 |
| 5. | IMS Health Inc. | 5.7 |
| 6. | Johnson & Johnson | 5.6 |
| 7. | Berkshire Hathaway Inc., Class B | 5.5 |
| 8. | Covidien Ltd. | 5.0 |
| 9. | Carnival Corp. | 4.9 |
| 10. | Omnicom Group Inc. | 4.9 |
| Grand Total 56.8% |
Portfolio Composition (%) as of June 30, 2008
| Ariel Focus Fund | Russell 1000 Value | Russell 1000 | S&P500 | |
|---|---|---|---|---|
| Consumer Discretionary and Services | 34.3% | 8.1% | 11.5% | 10.8% |
| Health Care | 16.8 | 11.1 | 11.9 | 12.2 |
| Technology | 12.7 | 3.5 | 13.5 | 14.0 |
| Financial Services | 12.3 | 25.2 | 15.5 | 15.1 |
| Other | 9.5 | 5.1 | 3.5 | 3.8 |
| Autos and Transportation | 6.9 | 1.6 | 2.4 | 2.6 |
| Producer Durables | 4.8 | 2.9 | 5.2 | 4.9 |
| Materials and Processing | 2.7 | 5.2 | 5.7 | 4.5 |
| Utilities | 0.0 | 12.8 | 7.7 | 7.8 |
| Other Energy | 0.0 | 5.9 | 8.1 | 7.3 |
| Integrated Oils | 0.0 | 12.3 | 7.6 | 8.8 |
| Consumer Staples | 0.0 | 6.3 | 7.4 | 8.2 |
|
* Represents percentage of total equity holdings in the portfolio The Russell 1000® Value Index measures the performance of large-sized, value-oriented companies with lower price-to-earnings ratios. The Russell 1000® Index measures the performance of larger companies. The S&P 500 Index is a broad market-weighted index dominated by blue chip stocks. |
||||
| Equity: | 100.0% |
| Cash, Assets & Other Liabilities: | 0.0% |
Portfolio Characteristics (%) as of June 30, 2008
| Ariel Focus Fund | Russell 1000 Value | Russell 1000 Index | S&P 500 | |
|---|---|---|---|---|
| Average Market Capitalization | $32.4 B | $37.1 B | $35.2 B | $47.4 B |
| Median Market Capitalization | 30.0 | 4.4 | 4.9 | 10.8 |
| Number of Holdings | 22 | 666 | 1,005 | 500 |
| Wall Street Analysts Per Stock | 13 | 16 | 17 | 17 |
| Turnover (%) | 32.4 | N/A | N/A | N/A |
| P/E (forward) | 13.0 | 11.5 | 13.5 | 13.2 |
| Beta (vs. Russell 3000 Index) | 0.84 | 0.79 | 0.93 | 0.89 |
| Price/Book | 2.5 | 1.7 | 2.4 | 2.4 |
| Dividend Yield (%) | 1.7 | 3.1 | 2.1 | 2.3 |
| Return on Equity (5 year) (%) | 18.3 | 18.7 | 20.3 | 20.8 |
| EPS Growth (forward) (%) | 11.6 | 9.5 | 12.7 | 12.0 |
|
The Russell 1000® Value Index measures the performance of large-sized, value-oriented companies with lower price-to-earnings ratios. The Russell 1000® Index measures the performance of larger companies. The S&P 500 Index is a broad market-weighted index dominated by blue chip stocks.
|
||||
Schedule of Holdings as of June 30, 2008
| Shares | Security Description | CUSIP | Ticker | Original Cost | Current Value | % of Net Assets |
|---|---|---|---|---|---|---|
| 27,500 | Toyota Motor Corp., ADR | C:892331307 | TM | 2,854,995 | 2,585,000 | 6.7 |
| 21,400 | International Business Machines Corp. | C:459200101 | IBM | 1,733,079 | 2,536,542 | 6.6 |
| 58,300 | Accenture Ltd, Class A | C:G1150G111 | ACN | 1,679,996 | 2,373,976 | 6.1 |
| 102,200 | Dell Inc. | C:24702R101 | DELL | 2,452,320 | 2,236,136 | 5.8 |
| 95,000 | IMS Health Inc. | C:449934108 | RX | 2,205,669 | 2,213,500 | 5.7 |
| 33,900 | Johnson & Johnson | C:478160104 | JNJ | 2,133,109 | 2,181,126 | 5.6 |
| 531 | Berkshire Hathaway Inc., Class B | C:084670207 | BRK.B | 1,578,910 | 2,130,372 | 5.5 |
| 40,075 | Covidien Ltd. | C:G2552X108 | COV | 1,483,903 | 1,919,192 | 5.0 |
| 57,000 | Carnival Corp. | C:143658300 | CCL | 2,633,339 | 1,878,720 | 4.9 |
| 41,800 | Omnicom Group Inc. | C:681919106 | OMC | 1,925,766 | 1,875,984 | 4.9 |
| 37,900 | Illinois Tool Works Inc. | C:452308109 | ITW | 1,986,277 | 1,800,629 | 4.7 |
| 51,500 | Walt Disney Co. | C:254687106 | DIS | 1,488,149 | 1,606,800 | 4.2 |
| 44,600 | JPMorgan Chase & Co. | C:46625H100 | JPM | 1,883,620 | 1,530,226 | 4.0 |
| 35,475 | Tyco International Ltd. | C:G9143X208 | TYC | 1,485,920 | 1,420,419 | 3.7 |
| 36,500 | Hewitt Associates, Inc., Class A | C:42822Q100 | HEW | 931,694 | 1,399,045 | 3.6 |
| 22,800 | Black & Decker Corp. | C:091797100 | BDK | 1,927,067 | 1,311,228 | 3.4 |
| 30,900 | Tiffany & Co. | C:886547108 | TIF | 1,137,950 | 1,259,175 | 3.3 |
| 34,500 | Morgan Stanley | C:617446448 | MS | 1,676,552 | 1,244,415 | 3.2 |
| 56,600 | Lowe's Cos., Inc. | C:548661107 | LOW | 1,390,893 | 1,174,450 | 3.0 |
| 1,057,575 | Fixed Income Clearing Corporation | C:85748R009 | 1,057,575 | 1,057,575 | 2.7 | |
| 34,700 | USG Corp. | C:903293405 | USG | 1,566,852 | 1,026,079 | 2.7 |
| 15,700 | Aflac Inc. | C:001055102 | AFL | 702,885 | 985,960 | 2.4 |
| 42,420 | UBS AG | C:H89231338 | UBS | 2,427,899 | 876,397 | 2.3 |
| Other Assets and Liabilities | 55,445 | 0.0 | ||||
| Grand Total | $40,344,419 | $38,678,391 | 100.0% | |||
Investment Objective
Our mutual funds pursue a common objective: long-term capital appreciation. The Funds invest for appreciation, not income. They seek stocks whose underlying value should increase over time. Any dividend and interest income the Funds earn is incidental to their fundamental objective. The Funds’ Adviser cannot guarantee any Fund will achieve capital appreciation in every circumstance, but we are dedicated to that objective.
Investment Strategy and Approach
Ariel Focus Fund invests primarily in the stocks of companies which at the time of initial purchase by the Fund have market capitalizations in excess of $10 billion.
Our Approach to Investing
By concentrating on long-term investing, Ariel believes that its patient approach allows it to take advantage of buying opportunities that frequently arise from Wall Street’s excessive focus on the short-term.
The Funds seek to invest in quality companies in industries where Ariel has expertise. The Funds only buy when Ariel determines that these businesses are selling at excellent values.
Quality
Ariel seeks to invest in quality companies whose future prospects include high barriers to entry in the industry; sustainable competitive advantages; and predictable fundamentals that allow for double digit earnings growth. We seek to invest in companies with quality management teams who are candid and honest; are able to clearly articulate and execute a strategy; have proven that they can attract and retain great people; and have demonstrated they invest cash wisely. We seek to invest in companies with quality financials including high returns on capital; strong balance sheets; and low reinvestment requirements.
Expertise
Ariel’s industry concentration helps to add value in areas we know well. Our reading of trade publications, newspapers, press releases, company financials and other corporate communications is critical to our decision making. Our expansive network of third-party contacts includes customers, suppliers, former employees and competitors who serve to independently verify our investment ideas.
Value
Ariel challenges conventional wisdom which allows us to stand out from the investing crowd. As disciplined investors, we generally seek to invest in companies when they are trading at a low valuation relative to potential earnings and/or a low valuation relative to intrinsic worth. As value investors, we make opportunistic purchases when companies that we believe are high quality are temporarily out of favor.
The Investment Process: A Focus On Independent Research
Uncovering Value
Ariel’s proprietary research process begins with the usual Wall Street sources – financial analysts’ reports, daily First Call reports, press releases and company financials. Digging deeper, we review more than 150 newspapers, trade periodicals and technical journals. In this way, we believe we can uncover outstanding opportunities that others may have missed.
We apply the same intensive research once we have identified a candidate for investment. We comb through the company’s financial history and analyze its prospects. We develop independent long-range financial projections and detail the risks.
A network of independent, third-party contacts reveals the invaluable insights of customers, suppliers, former employees, competitors and industry insiders, as well as other investment managers.
We also independently assess key executives. We believe the character and quality of a company’s management weighs at least as heavily as any other factor in determining its success. We believe the skill of the management team will help the company overcome unforeseen obstacles. In addition, the team’s contacts and experience may alert the company to emerging opportunities.
A portfolio consisting exclusively of stocks in these companies is highly select: Ariel Fund and Ariel Appreciation Fund generally contain no more than 50 stocks each; Ariel Focus Fund will generally own 20 stocks.
A Long-term View
Ariel believes the market will ultimately reward the companies in which we invest, and we give them the time such recognition requires, typically two to five years and sometimes even longer. This long-term approach means that the Ariel Mutual Funds typically have low rates of turnover*.
Each time a fund turns over a holding (e.g., sells one stock to buy another), it incurs transaction charges that negatively impact investment returns – the higher the turnover rate, the more negative the impact of the transaction costs. High turnover rates can reduce investment performance while low turnover rates can enhance it. A low rate of turnover can offer yet another advantage because it may defer a fund’s taxable capital gains.
We sell stocks when we believe they are fully valued or when our reasons for purchase no longer apply. We define fully valued to be our assessment of full valuation relative to potential earnings, which includes a price-to-earnings ratio of more than 20 times next year’s earnings and full valuation relative to intrinsic worth (i.e., a 0% discount to our private market value). We also may sell a stock when there is a major change in the competitive landscape, a substantial shift in company fundamentals or a loss of faith in management’s abilities.
Foreign Securities
Ariel Focus Fund may invest up to 20% of its net assets in foreign securities, as classified by the Adviser. Ariel Fund and Ariel Appreciation Fund may invest up to 10% of their respective net assets in foreign securities. Investments in foreign securities may be made through the purchase of individual securities on recognized exchanges and developed over-the-counter markets, or through American Depositary Receipts (“ADRs”) or Global Depositary Receipts (“GDRs”) covering such securities. The Funds expect to invest in foreign securities mainly through ADRs or GDRs.
The value of foreign securities may be affected by changes in exchange rates, as well as other factors that affect securities prices. There generally is less information publicly available about foreign securities and foreign securities markets, and there may be less government regulation and supervision of foreign issuers and foreign securities markets. Foreign securities and markets also may be affected by political and economic instabilities and may be more volatile and less liquid than domestic securities and markets. The Funds have not invested in, and do not currently expect to invest in, “emerging” foreign market securities.
Cash Positions
At times we may maintain larger than normal cash positions in a Fund. However, cash positions in a Fund are generally not held for defensive purposes, but are maintained while we search for compelling investments.
Definitions
Undervalued
Institutional investors consider a stock undervalued when it trades at a price below what they think the business is worth. The concept is relative. Investors might judge a stock undervalued on the basis of price to earnings ratio: they pay less for a dollar of corporate earnings when they buy a particular stock than they would if they bought another stock. Or they might judge a stock undervalued on the basis of the ratio of the value of its assets to the value of its market capitalization: they pay less for a dollar of assets by buying one stock than they would if they bought another stock.
Turnover
Turnover is an indication of how long a fund typically holds the stocks it purchases. A turnover rate of 100% implies that a fund changes its entire investment portfolio every year. As a product of our long-term investment strategy, turnover rates for the Ariel Fund and Ariel Appreciation Fund have been historically low (i.e., less than 50%).
Portfolio Snapshot
Portfolio Snapshots offer monthly and quarterly commentary on the performance of our Funds.
Additional Commentary
For commentary on all of our mutual funds, including Fund Updates, the quarterly letters from our Portfolio Managers and a selection of spotlights on typical Fund holdings, visit our main Commentary area.
Quarterly Portfolio Manager Commentary
This quarterly letter offers a performance update as well as our thoughts on the economy and our perspectives on investing.
Open the latest Ariel Focus Fund Quarterly Letter