Value Strategy
Ariel Mid Cap 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: generally between $2 billion and $15 billion
Inception: March 31, 1990
Number of holdings: 25-45
Turnover: 20-30%
Assets: $981.8 million as of 09/30/2014
 
Portfolio Managers
John W. Rogers, Jr.
Co-Portfolio Manager
Fidler_Tim_Web.png Timothy Fidler, CFA ®
Co-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

 
Independent Thinking
John W. Rogers, Jr. on
Independent Thinking
 
TF-Focus-Expertise.png
Tim Fidler on
Focus and Expertise
Quarter End
Month End
Ariel Mid Cap Value Composite

Performance

As of September 30, 2014
Inception date: March 31, 1990 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees -4.00% -2.60% 1.41% 13.18% 26.53% 17.68% 9.96% 12.43%
Net of Fees -4.08% -2.84% 0.66% 12.06% 25.28% 16.51% 8.87% 11.31%
Russell Midcap® Value Index -3.80% -2.64% 8.20% 17.46% 24.72% 17.24% 10.17% 12.16%
Russell Midcap® Index -3.34% -1.66% 6.87% 15.83% 23.79% 17.19% 10.34% 11.82%
S&P 500® Index -1.40% 1.13% 8.34% 19.73% 22.99% 15.70% 8.11% 9.75%
Ariel Mid Cap Value Composite

Performance

As of September 30, 2014
Inception date: March 31, 1990 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees -4.00% -2.60% 1.41% 13.18% 26.53% 17.68% 9.96% 12.43%
Net of Fees -4.08% -2.84% 0.66% 12.06% 25.28% 16.51% 8.87% 11.31%
Russell Midcap® Value Index -3.80% -2.64% 8.20% 17.46% 24.72% 17.24% 10.17% 12.16%
Russell Midcap® Index -3.34% -1.66% 6.87% 15.83% 23.79% 17.19% 10.34% 11.82%
S&P 500® Index -1.40% 1.13% 8.34% 19.73% 22.99% 15.70% 8.11% 9.75%


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 Mid Cap Value Composite seeks long-term capital appreciation by investing in mid-sized undervalued companies that show strong potential for growth. The Ariel Mid Cap Value Composite differs from its benchmark, the Russell Midcap® Value Index, with 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, which is currently 1.00% per annum. 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. Effective August 1, 2010, the Ariel Mid Cap Value Composite was redefined to exclude pooled funds due to differences in performance calculation methods. The Ariel Mid Cap Value Composite has been examined for the periods from April 1, 1990 through December 31, 2013. A copy of the examination report is available upon request. Past performance does not guarantee future results. Investing in mid-cap stocks is more risky and 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 Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies. 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 Mid Cap Value (Representative Portfolio)

Schedule of Holdings

As of September 30, 2014
Shares Security Description CUSIP Ticker Market Price Market Value % of
Net
Assets
Top Ten Equity Holdings
143,300 First American Financial Corp. 31847R102 FAF 27.12 3,886,296 4.5
56,600 Bristow Group Inc. 110394103 BRS 67.20 3,803,520 4.4
40,930 Stanley Black & Decker, Inc. 854502101 SWK 88.79 3,634,175 4.2
226,400 Western Union Co. 959802109 WU 16.04 3,631,456 4.2
44,200 Northern Trust Corp. 665859104 NTRS 68.03 3,006,926 3.5
53,600 Franklin Resources, Inc. 354613101 BEN 54.61 2,927,096 3.4
29,200 J.M. Smucker Co. 832696405 SJM 98.99 2,890,508 3.3
28,700 Zimmer Holdings, Inc. 98956P102 ZMH 100.55 2,885,785 3.3
157,486 Interpublic Group of Cos., Inc. 460690100 IPG 18.32 2,885,144 3.3
56,900 Lazard Ltd G54050102 LAZ 50.70 2,884,830 3.3
39,100 Nordstrom, Inc. 655664100 JWN 68.37 2,673,267 3.1
44,100 AFLAC Inc. 001055102 AFL 58.25 2,568,825 3.0
19,500 JLL 48020Q107 JLL 126.34 2,463,630 2.8
35,300 Omnicom Group Inc. 681919106 OMC 68.86 2,430,758 2.8
57,600 Kennametal Inc. 489170100 KMT 41.31 2,379,456 2.7
71,100 International Speedway Corp. 460335201 ISCA 31.64 2,249,604 2.6
26,500 Illinois Tool Works Inc. 452308109 ITW 84.42 2,237,130 2.6
18,100 Snap-On Inc. 833034101 SNA 121.08 2,191,548 2.5
35,500 St. Jude Medical, Inc. 790849103 STJ 60.13 2,134,615 2.5
39,700 CBS Corp. 124857202 CBS 53.50 2,123,950 2.5
27,000 City National Corp. 178566105 CYN 75.67 2,043,090 2.4
19,100 Laboratory Corp. of America Holdings 50540R409 LH 101.75 1,943,425 2.2
15,768 Thermo Fisher Scientific Inc. 883556102 TMO 121.70 1,918,966 2.2
23,900 Viacom, Inc. 92553P201 VIAB 76.94 1,838,866 2.1
32,400 Hospira, Inc. 441060100 HSP 52.03 1,685,772 1.9
49,400 Blackstone Group L.P. 09253U108 BX 31.48 1,555,112 1.8
43,200 Newell Rubbermaid Inc. 651229106 NWL 34.41 1,486,512 1.7
66,500 KKR & Co. L.P. 48248M102 KKR 22.30 1,482,950 1.7
45,800 Gannett Co., Inc. 364730101 GCI 29.67 1,358,886 1.6
18,800 Madison Square Garden Co. 55826P100 MSG 66.12 1,243,056 1.4
34,700 Coach, Inc. 189754104 COH 35.61 1,235,667 1.4
9,400 Bio-Rad Laboratories, Inc. 090572207 BIO 113.40 1,065,960 1.2
35,700 CBRE Group, Inc. 12504L109 CBG 29.74 1,061,718 1.2
12,800 T. Rowe Price Group, Inc. 74144T108 TROW 78.40 1,003,520 1.2
26,400 Contango Oil & Gas Co. 21075N204 MCF 33.24 877,536 1.1
24,500 Sotheby's 835898107 BID 35.72 875,140 1.1
62,400 Janus Capital Group Inc. 47102X105 JNS 14.54 907,296 1.0
8,900 Towers Watson 891894107 TW 99.50 885,550 1.0
3,500 Tiffany & Co. 886547108 TIF 96.31 337,085 0.5
  Cash Balance       5,917,099 6.8
Grand Total     $86,611,725 100.0%  

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 Mid Cap 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 Mid Cap Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2014
  Ariel Mid Cap Value Russell Midcap Value Russell Midcap S&P 500
Financial Services 36.76 32.79 21.61 17.38
Consumer Discretionary 28.75 10.22 17.85 13.52
Producer Durables 16.28 9.75 12.74 10.73
Health Care 13.75 8.28 10.30 13.16
Consumer Staples 3.14 3.15 5.39 8.38
Energy 1.32 6.11 6.79 10.89
Utilities 0.00 12.67 6.56 5.56
Materials and Processing 0.00 7.90 7.00 3.90
Technology 0.00 9.13 11.75 16.18



Represents percentage of total equity holdings in the representative portfolio


Ariel Mid Cap Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2014
  Market Capitalization Ariel Mid Cap Value Russell Midcap Value Russell Midcap S&P 500
Market Capitalization (In billions)        
Large Capitalization 80.39 & Above 0 0 0 46
Medium/Large Capitalization 23.62 -- 80.39 16.2 3.4 5.7 32.7
Medium Capitalization 8.07 -- 23.62 42.9 55.3 58 18.7
Medium/Small Capitalization 3.24 -- 8.07 26 36.1 32.8 2.6
Small Capitalization 3.24 & Below 14.8 5.2 3.5 0
Dollar-Weighted Average (BIL)*   $9.19 $9.40 $10.16 $69.52
Valuation Metrics  
Forward Price/Earnings   15.9 17.3 19 16.6
Trailing Price/Earnings   18.8 21.5 25.3 19.1
Discount to Private Market Value   -11.7 n/a n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth   10.9 9.7 12.5 11
Interest Coverage Ratio   7.3 4.1 4.9 8.6
Portfolio Construction  
Number of Holdings   40 561 833 501
Turnover   23 n/a 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 Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies. 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.