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Deep Value Strategy
Ariel Small Cap Deep Value

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.

Facts
Market Cap Range: Under $2 billion
Inception: October 31, 2013
Number of holdings: 35-40
Turnover: 20-50%
Assets: $80.3 million as of 09/30/2014
 
Portfolio Managers
Maley_David_web.png David M. Maley
Lead Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Portfolio Manager
 

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

 
DM-Deep-Value.png
David Maley on
Deep Value Investing

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 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

Quarter End
Month End
Ariel Small Cap Deep Value Composite

Performance

As of September 30, 2014
Inception date: October 31, 2013  
  One
Month
Three
Months
Year To
Date
Since
Inception
Gross of Fees -8.62% -10.94% -14.34% -9.61%
Net of Fees -8.70% -11.16% -14.98% -10.43%
Russell 2000® Value Index -6.75% -8.58% -4.74% 0.85%
S&P 500® Index -1.40% 1.13% 8.34% 14.47%
Ariel Small Cap Deep Value Composite

Performance

As of September 30, 2014
Inception date: October 31, 2013  
  One
Month
Three
Months
Year To
Date
Since
Inception
Gross of Fees -8.62% -10.94% -14.34% -9.61%
Net of Fees -8.70% -11.16% -14.98% -10.43%
Russell 2000® Value Index -6.75% -8.58% -4.74% 0.85%
S&P 500® Index -1.40% 1.13% 8.34% 14.47%


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®). This strategy seeks long-term capital appreciation by investing in small-sized companies that are selling at deep discounts to their intrinsic value. The strategy may hold cash when values are difficult to identify. The Ariel Small Cap Deep Value Composite differs from its benchmark, the Russell 2000® 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. The Ariel Small Cap Deep Value Composite has been examined for the period from November 1, 2013 through December 31, 2013. A copy of the examination report is available upon request. Past performance does not guarantee future results. 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 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 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 Small Cap Deep Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2014
  Ariel Small Cap Deep Value Russell 2000 Value S&P 500
Technology 19.78 9.15 16.18
Financial Services 16.42 38.40 17.38
Consumer Discretionary 15.48 11.35 13.52
Producer Durables 13.62 14.20 10.73
Materials and Processing 11.74 5.82 3.90
Energy 11.06 6.60 10.89
Utilities 8.86 7.47 5.56
Health Care 3.04 4.85 13.16
Consumer Staples 0.00 2.15 8.38

Represents percentage of total equity holdings in the representative portfolio



Ariel Small Cap Deep Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2014
  Market Capitalization Ariel Small Cap Deep Value 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)*   $0.42 $1.33 $69.52
Valuation Metrics  
Price/Book   1.4 1.6 2.7
Price/Sales   1.2 1.4 1.9
Trailing Price/Earnings   114.9 28.2 19.1
P/E Excluding Negative Earnings   31.6 20.1 18.6
Discount to Private Market Value   -30.8 n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth   14.3 10.5 11
Portfolio Construction  
Debt/Equity   0.6 0.9 1.2
Number of Holdings   37 1,321 501


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 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.


(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
276,300 Cowen Group, Inc. 223622101 COWN 3.75 1,036,125 5.7
30,600 Contango Oil & Gas Co. 21075N204 MCF 33.24 1,017,144 5.6
174,800 ORBCOMM, Inc. 68555P100 ORBC 5.75 1,005,100 5.5
32,800 First American Financial Corp. 31847R102 FAF 27.12 889,536 4.9
26,000 International Speedway Corp. 460335201 ISCA 31.64 822,640 4.5
61,000 Erickson Inc. 29482P100 EAC 12.99 792,390 4.3
550,300 Pendrell Corp. 70686R104 PCO 1.34 737,402 4.0
52,600 Landec Corp. 514766104 LNDC 12.25 644,350 3.5
77,100 PCTEL, Inc. 69325Q105 PCTI 7.59 585,189 3.2
52,100 XO Group Inc. 983772104 XOXO 11.21 584,041 3.2
340,400 Rentech, Inc. 760112102 RTK 1.71 582,084 3.2
112,300 Century Casinos, Inc. 156492100 CNTY 5.13 576,099 3.1
67,500 Rosetta Stone Inc. 777780107 RST 8.05 543,375 3.0
30,300 Gulf Island Fabrication, Inc. 402307102 GIFI 17.20 521,160 2.8
28,300 Oplink Communications, Inc. 68375Q403 OPLK 16.82 476,006 2.6
100,084 Spartan Motors Inc. 846819100 SPAR 4.67 467,392 2.6
30,300 AV Homes, Inc. 00234P102 AVHI 14.65 443,895 2.4
11,900 Capital Southwest Corp. 140501107 CSWC 35.77 425,663 2.3
62,300 Furmanite Corp. 361086101 FRM 6.76 421,148 2.3
60,000 RealNetworks, Inc. 75605L708 RNWK 6.95 417,000 2.3
38,200 Brooks Automation, Inc. 114340102 BRKS 10.51 401,482 2.2
133,900 Imation Corp. 45245A107 IMN 2.95 395,005 2.2
10,100 Team, Inc. 878155100 TISI 37.91 382,891 2.1
34,000 Mitcham Industries, Inc. 606501104 MIND 11.05 375,700 2.1
45,400 ARC Document Solutions, Inc. 00191G103 ARC 8.10 367,740 2.0
68,400 Orion Energy Systems, Inc. 686275108 OESX 5.35 365,940 2.0
49,000 Pozen Inc. 73941U102 POZN 7.34 359,660 2.0
53,100 Telenav Inc. 879455103 TNAV 6.70 355,770 1.9
78,300 Sigma Designs, Inc. 826565103 SIGM 4.31 337,473 1.8
10,200 Simpson Manufacturing Co., Inc. 829073105 SSD 29.15 297,330 1.6
16,200 Superior Industries Intl, Inc. 868168105 SUP 17.53 283,986 1.6
8,800 MB Financial, Inc. 55264U108 MBFI 27.68 243,584 1.3
25,600 Multi-Fineline Electronix, Inc. 62541B101 MFLX 9.35 239,360 1.3
48,500 Rubicon Technology, Inc. 78112T107 RBCN 4.25 206,125 1.1
8,500 Brink's Co. 109696104 BCO 24.04 204,340 1.0
156,400 Vical Inc. 925602104 VICL 1.12 175,168 0.9
  Cash Balance       341,187 1.9
Grand Total     $18,320,480 100.0%  

Ariel Small Cap Deep 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
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.