Investment Strategy and Approach

To capture anticipated growth, the Ariel Small/Mid Cap Value Product generally holds investments for a relatively long period, usually two to five years. Our small/mid cap value strategy invests in companies with market capitalizations generally from $1 billion to $10 billion.

Our Approach to Investing
By concentrating on the long-term, our patient approach allows us to take advantage of the great buying opportunities that frequently arise from Wall Street’s excessive focus on the short-term.

We invest in quality companies in industries where we have proven expertise. And we only buy when these quality businesses are selling at excellent values.

Quality

• We invest in quality companies whose future prospects include: high barriers to entry; sustainable competitive advantages; and predictable fundamentals that allow for double digit cash earnings growth.
• We invest 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 invest in companies with improving prospects for quality financials including the ability to ultimately demonstrate: high returns on capital; strong balance sheets; and low reinvestment requirements.

Expertise

• Our industry concentration enables us to have value-added expertise in areas we know extraordinarily well.
• Our voracious reading of trade publications, newspapers, press releases, company financials and other corporate communications is critical to our decision making.
• Our expansive scuttlebutt network of third-party contacts includes customers, suppliers, former employees and competitors who serve to independently verify our investment thesis.

Value

• As Warren Buffett disciples, we challenge conventional wisdom which allows us to stand out from the investing crowd.
• As disciplined investors, we seek to invest in companies when they are trading at a low valuation relative to potential earnings (p/e less than 13x forward cash earnings) and/or a low valuation relative to intrinsic worth (40% discount to private market value—PMV).
• As value investors, we make opportunistic purchases when great companies are temporarily out of favor.

The Investment Process
We believe that successful long-term investing is not a matter of guesswork or speculation but of diligent research and sound judgment. We are convinced that both original, creative research and intensive stock analysis are important components of long-term investment success. Thus, at weekly research meetings, our research team debates the merits of individual issues with a disciplined approach that involves qualitative as well as quantitative analysis. All research professionals are charged with conducting proprietary, fundamental research. Our process consists of rigorous financial and fundamental analysis focusing on such elements as product and service quality, management ability, and the presence of a strong and consistent business franchise. Ariel’s initial stock universe is developed through several methods, including extensive reading, industry contacts, and fundamental stock analysis. All of these are discussed in more detail below.

Extensive Reading
Through disciplined reading of business journals, general interest periodicals, trade publications, and Wall Street research reports, our investment team continually monitors trends in the marketplace. As they scour the markets for undervalued stocks, our chief investment officer and investment team are continually searching for issues that have been widely ignored by Wall Street analysts, institutional investors, and the media.

Industry Contacts
As we continually search for new stock ideas or look to uncover additional information about current holdings, we maintain a host of contacts. Our investment professionals are experts in the industries they cover and have cultivated deep contacts that are not limited to the investment professionals with whom we often share ideas, trade information and debate points of view. They also include competitors, customers, suppliers and others who may be able to add important insights to our proprietary research process. In keeping with our investigative research effort, we believe that the knowledge derived from these sources allows for more informed investment decisions.

Fundamental Stock Analysis
When a stock appears attractive, we take the next step; our research analysts work with the appropriate investment committee member to make a preliminary recommendation. This review includes analysis of historical and projected financial performance, a thorough check on product quality, as well as an in-depth study of company fundamentals and future prospects. Promising stocks are then subjected to a comprehensive industry review. We conduct on-site visits to inspect facilities and to conduct face-to-face interviews with a company’s senior managers. Since we believe that management is a critical determinant of long-term success, we want to know all that we can about the background and business history of a company’s key people. We ask the basic resume questions about prior jobs, educational background, and community involvement as a means of assessing a manager’s commitment to their business and their probability of long-term success. We further probe into their understanding of overall industry trends, ability to articulate and reach expected goals, and knowledge of their competitors’ advantages, among other key areas of discussion. This important information is largely absent from Wall Street research reports. We look to see that the goals, objectives, and values discussed in annual reports and press releases are confirmed and reinforced by what senior managers say and do.

Following the preliminary fact gathering period, our analysts and investment committee members then prepare a report on the company and distribute it to the entire research staff with a proposal to complete a full report or monitor or avoid the security. Ideas are then discussed in detail at weekly research meetings, and subsequent investment committee meetings, to candidly debate the merits of each issue and challenge one another’s thinking.

If the chief investment officer determines that further research needs to be prepared, the analyst and investment committee member would complete a full report, conduct any additional independent verification, and provide the completed report for discussion at the next investment committee meeting. The final decision on whether to purchase or avoid the security is determined by the chief investment officer.