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Ariel Focused Value

Why Ariel’s value approach


Ariel’s flagship value approach is built on the basic principle of targeting undervalued companies that show a strong potential for growth. We take advantage of the market’s short-term thinking to optimize long-term results for our clients.

Our track record is one of the longest in the business

As a pioneer in small- and mid-cap value investing, our 30-year history has been distinguished by excellent long-term results—attributable to one portfolio manager for the duration.

Clearly defined parameters enhance our screening outcomes

We look for differentiated companies with strong brands/franchises, strong cash flows, low debt, high-quality products or services, significant barriers to entry (moats) and low reinvestment requirements.

Concentrated yet diversified portfolios focus on our highest-conviction ideas

We choose to go deep instead of broad, often taking a contrarian point of view.

In-depth sector and industry expertise informs each investment decision

Our portfolio managers and research analysts evaluate companies within a well-established "circle of competence" — industries where we are truly experts.

Risk management is a top priority

We define risk as a permanent loss of capital, controlled at the portfolio and stock level via allocation limits, our focus on private market value (PMV) and our in-depth understanding of the companies we choose.

We also mitigate risk by investing with a margin of safety (40% discount to PMV), employing proprietary debt and moat ratings and using a devil’s advocate to challenge our own views.



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.

Facts
Market Cap Range: All Cap
Inception: March 31, 2005
Number of holdings: 20-30
Turnover: 25-40%
Assets: $124.6 million as of 06/30/2014
 
Portfolio Manager
Bobrinskoy_Charlie_Web.png Charles K. Bobrinskoy
Portfolio Manager
 

Our value investment philosophy


Patience

We take the long-term view.
  • Look past short-term noise: three- to five-year horizon enables us to be opportunistic when price dislocations arise
  • Take our time to research a potential holding and patiently wait for the margin of safety we require
  • Build expertise and accumulate deep knowledge; develop and cultivate independent sources to inform our stock picking

Independence

We invest to our convictions, not to benchmarks.
  • Build truly active portfolios concentrated in a limited number of names and industries
  • Buy out-of-favor, misunderstood and ignored stocks
  • Buy when others are selling, and sell when others are buying

Expertise

We specialize in bottom-up, fundamental analysis.
  • Draw on extensive reading, industry expertise, and computer screening to identify overlooked opportunities
  • Surround company to identify prospects - and problems - others don't recognize
  • Ask questions to gain insight, not just information

Teamwork

We work collaboratively with a shared commitment to excellence.
  • Leverage contacts and knowledge across portfolios
  • Senior research team input informs final decisions made by lead or co-portfolio manager

 
CB-Quality-Buffet-Way.png
Charlie Bobrinskoy on
High Quality Value Investing
Quarter End
Month End
Ariel Focused Value Composite

Performance

As of August 31, 2014
Inception date: March 31, 2005 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Since
Inception
Gross of Fees 2.87% 6.98% 11.47% 26.19% 19.70% 16.13% 7.88%
Net of Fees 2.81% 6.81% 10.99% 25.23% 18.61% 15.04% 6.84%
Russell 1000® Value Index 3.68% 4.57% 10.35% 24.43% 21.57% 16.62% 7.44%
S&P 500® Index 4.00% 4.69% 9.89% 25.25% 20.61% 16.88% 8.03%
Ariel Focused Value Composite

Performance

As of June 30, 2014
Inception date: March 31, 2005 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Since
Inception
Gross of Fees 3.55% 5.23% 7.90% 26.00% 15.25% 18.60% 7.64%
Net of Fees 3.49% 5.06% 7.55% 24.96% 14.17% 17.47% 6.60%
Russell 1000® Value Index 2.61% 5.10% 8.28% 23.81% 16.92% 19.23% 7.36%
S&P 500® Index 2.07% 5.23% 7.14% 24.61% 16.58% 18.83% 7.88%


Ariel Investments, LLC is a money management firm headquartered in Chicago, Illinois. Taking a long-term view and applying independent thinking to our investment decisions, we span the market cap spectrum from micro to large and cover the globe with our international and global offerings. Ariel claims compliance with the Global Investment Performance Standards (GIPS®). The Ariel Focused Value Composite seeks longā€term capital appreciation by investing primarily in equity securities of companies of any size in order to provide investors access to superior opportunities in companies of all market capitalizations. The Ariel Focused Value Composite differs from its benchmark, the Russell 1000® Value Index, with dramatically fewer holdings concentrated in fewer sectors. Index returns reflect the reinvestment of income and other earnings. Indexes are unmanaged, and investors cannot invest directly in an index. Performance results are net of transaction costs and reflect the reinvestment of dividends and other earnings. Net returns reflect the deduction of the maximum advisory fee in effect for the respective period. Effective 1/1/14 the maximum fee is 0.65% per annum. Fees for prior periods are available upon request. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Fee information is available upon request and may also be found in Ariel’s Form ADV, Part 2. Results shown may be preliminary. Returns are calculated in U.S. dollars. The Ariel Focused Value Composite has been examined for the periods from April 1, 2005 through December 31, 2013. A copy of the examination report is available upon request. Past performance does not guarantee future results. Investing in equity stocks is risky and subject to the volatility of the markets. Investing in small cap and mid-cap stocks is more risky and more volatile than investing in large cap stocks. The intrinsic value of the stocks in which the portfolio invests may never be recognized by the broader market. Click here to obtain a complete list of composite descriptions or a presentation that adheres to the GIPS standards.

The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected 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 Focused Value (Representative Portfolio)

Schedule of Holdings

As of June 30, 2014
Shares Security Description CUSIP Ticker Market Price Market Value % of
Net
Assets
Top Ten Equity Holdings
510 Stanley Black & Decker, Inc. 854502101 SWK 87.82 44,788 5.4
1,060 Microsoft Corp. 594918104 MSFT 41.70 44,202 5.3
535 National Oilwell Varco 637071101 NOV 82.35 44,057 5.3
2,475 Western Union Co. 959802109 WU 17.34 42,917 5.2
260 Lockheed Martin Corp. 539830109 LMT 160.73 41,790 5.0
225 International Business Machines Corp. 459200101 IBM 181.27 40,786 4.9
375 Exxon Mobil Corp. 30231G102 XOM 100.68 37,755 4.5
705 Mosaic Co. 61945C103 MOS 49.45 34,862 4.2
315 Johnson & Johnson 478160104 JNJ 104.62 32,955 4.0
435 CVS Caremark Corp. 126650100 CVS 75.37 32,786 3.9
950 Chesapeake Energy Corp. 165167107 CHK 31.08 29,526 3.5
500 Target Corp. 87612E106 TGT 57.95 28,975 3.5
685 Oracle Corp. 68389X105 ORCL 40.53 27,763 3.3
265 Apache Corp. 037411105 APA 100.62 26,664 3.2
252 Laboratory Corp. of America Holdings 50540R409 LH 102.40 25,805 3.1
1,398 Barrick Gold Corp. 067901108 ABX 18.30 25,583 3.1
1,585 International Game Technology 459902102 IGT 15.91 25,217 3.0
805 Newell Rubbermaid Inc. 651229106 NWL 30.99 24,947 3.0
145 Goldman Sachs Group, Inc. 38141G104 GS 167.44 24,279 2.9
680 Morgan Stanley 617446448 MS 32.33 21,984 2.6
365 JPMorgan Chase & Co. 46625H100 JPM 57.62 21,031 2.5
200 Zimmer Holdings, Inc. 98956P102 ZMH 103.86 20,772 2.5
275 Baxter Intl Inc. 071813109 BAX 72.30 19,883 2.4
495 Bank of New York Mellon Corp. 064058100 BK 37.48 18,553 2.2
545 Apollo Education Group, Inc. 037604105 APOL 31.25 17,031 2.0
325 Hospira, Inc. 441060100 HSP 51.37 16,695 2.0
115 Snap-On Inc. 833034101 SNA 118.52 13,630 1.6
220 Bed Bath & Beyond Inc. 075896100 BBBY 57.38 12,624 1.6
815 Pier 1 Imports, Inc. 720279108 PIR 15.41 12,559 1.6
260 Kennametal Inc. 489170100 KMT 46.28 12,033 1.5
  Cash Balance       9,600 1.2
Grand Total     $832,052 100.0%  

Our value process


Idea Generation

Looking through a long-term lens helps identify ideas others might not consider
  • Process:
    Generate ideas from industry knowledge, extensive reading and computer screening
  • Risk management:
    Look for out-of-favor, misunderstood and ignored stocks whose low prices reduce the risk of owning them
  • Benefit:
    In-depth industry knowledge helps uncover investment ideas others may have overlooked

Bottom-up Research

Bottom-up research determines underlying value and identifies key issues
  • Process:
    Extensive valuation work and independent verification
  • Risk management:
    Seek to invest in companies whose equities are trading at a 40% discount to PMV and/or 13x or less next year's earnings
  • Benefit:
    Helps us find quality companies in industries where our expertise adds value

Team Validation

Team review and debate test the validity of our convictions
  • Process:
    Rigorous debate and discussion
  • Risk management:
    A devil's advocate may be assigned to challenge an investment thesis
  • Benefit:
    Ideas vetted from multiple perspectives yield more informed final decisions by portfolio manager(s)

Portfolio Construction

Concentrated yet diversified portfolios drive better outcomes
  • Process:
    Build concentrated yet diversified portfolios weighted by conviction
  • Risk management:
    Strict buy and sell criteria
  • Benefit:
    Unique portfolio with benchmark-agnostic industry weightings drives high active share and thereby helps generate alpha

Ariel Focused Value

Commentary

 
Monthly Commentary: Perspectives on the current market
Quarterly Commentary: Quarterly performance update and communication to investors
Turtle Thoughts: A compilation of our portfolio manager letters
Fact Sheets: Quarterly product overview
Ariel Focused Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2014
  Ariel Focused Value Russell 1000 Value S&P 500
Energy 16.78 13.90 10.89
Financial Services 15.66 28.86 17.38
Consumer Discretionary 14.76 7.41 13.52
Health Care 14.12 12.98 13.16
Technology 13.71 8.44 16.18
Producer Durables 13.65 10.42 10.73
Materials and Processing 7.35 3.63 3.90
Consumer Staples 3.99 5.72 8.38
Utilities 0.00 8.64 5.56



Represents percentage of total equity holdings in the representative portfolio


Ariel Focused Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2014
  Market Capitalization Ariel Focused Value Russell 1000 Value S&P 500
Market Capitalization (In billions)      
Large Capitalization 80.39 & Above 28.9 39.2 46
Medium/Large Capitalization 23.62 -- 80.39 27.5 29.8 32.7
Medium Capitalization 8.07 -- 23.62 33.9 18.4 18.7
Medium/Small Capitalization 3.24 -- 8.07 8.3 11.1 2.6
Small Capitalization 3.24 & Below 1.5 1.6 0
Dollar-Weighted Average (BIL)*   $37.25 $51.20 $69.52
Valuation Metrics  
Forward Price/Earnings   14.4 15.3 16.6
Trailing Price/Earnings   17.4 17.5 19.1
Discount to Private Market Value   -13.9 n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth   8.9 8.8 11
Interest Coverage Ratio   8.1 6.1 8.6
Portfolio Construction  
Number of Holdings   30 685 501
Turnover   44.2 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.

The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected 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.

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.