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Ariel Small/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 $1 billion and $7.5 billion
Inception: December 31, 2000
Number of holdings: 25-45
Turnover: 20-30%
Assets: $410.1 million as of 03/31/2014
 
Portfolio Managers
John W. Rogers, Jr.
Lead Portfolio Manager
John P. Miller, CFA
Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
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

 
JWR-Independent-Thinking.png
Lessons Learned from the Basketball Court
Quarter End
Month End
Ariel Small/Mid Cap Value Composite

Performance

As of March 31, 2014
Inception date: December 31, 2000 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees -1.10% -0.52% -0.52% 23.39% 12.81% 30.73% 8.25% 9.49%
Net of Fees -1.18% -0.76% -0.76% 22.17% 11.69% 29.44% 7.18% 8.41%
Russell 2500™ Value Index 1.37% 3.52% 3.52% 21.76% 13.88% 24.81% 9.01% 10.16%
Russell 2500™ Index -0.36% 2.30% 2.30% 24.01% 13.95% 25.33% 9.43% 9.06%
S&P 500® Index 0.84% 1.81% 1.81% 21.86% 14.66% 21.16% 7.42% 4.70%
Ariel Small/Mid Cap Value Composite

Performance

As of March 31, 2014
Inception date: December 31, 2000 Annualized
  One
Month
Three
Months
Year To
Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees -1.10% -0.52% -0.52% 23.39% 12.81% 30.73% 8.25% 9.49%
Net of Fees -1.18% -0.76% -0.76% 22.17% 11.69% 29.44% 7.18% 8.41%
Russell 2500™ Value Index 1.37% 3.52% 3.52% 21.76% 13.88% 24.81% 9.01% 10.16%
Russell 2500™ Index -0.36% 2.30% 2.30% 24.01% 13.95% 25.33% 9.43% 9.06%
S&P 500® Index 0.84% 1.81% 1.81% 21.86% 14.66% 21.16% 7.42% 4.70%


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 Small/Mid Cap Value Composite seeks long-term capital appreciation by investing in small/mid-sized undervalued companies that show strong potential for growth. The Ariel Small/Mid Cap Value Composite differs from its benchmark, the Russell 2500™ 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/Mid Cap Value Composite has been examined for the periods from January 1, 2001 through December 31, 2012. A copy of the examination report is available upon request. Past performance does not guarantee future results. Investing in small 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 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2500 of the smallest securities based on a combination of their market cap and current index membership. 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/Mid Cap Value (Representative Portfolio)

Schedule of Holdings

As of March 31, 2014
Shares Security Description CUSIP Ticker Market Price Market Value % of
Net
Assets
Top Ten Equity Holdings
52,700 Lazard Ltd G54050102 LAZ 47.09 2,481,643 4.3
82,300 CBRE Group, Inc. 12504L109 CBG 27.43 2,257,489 3.9
18,700 JLL 48020Q107 JLL 118.50 2,215,950 3.8
40,400 Royal Caribbean Cruises Ltd. V7780T103 RCL 54.56 2,204,224 3.8
95,700 KKR & Co. L.P. 48248M102 KKR 22.84 2,185,788 3.8
192,800 Janus Capital Group Inc. 47102X105 JNS 10.87 2,095,736 3.6
43,900 Hospira, Inc. 441060100 HSP 43.25 1,898,675 3.3
18,700 Anixter Intl Inc. 035290105 AXE 101.52 1,898,424 3.3
107,960 Interpublic Group of Cos., Inc. 460690100 IPG 17.14 1,850,434 3.2
122,900 International Game Technology 459902102 IGT 14.06 1,727,974 3.0
63,900 First American Financial Corp. 31847R102 FAF 26.55 1,696,545 2.9
102,400 Western Union Co. 959802109 WU 16.36 1,675,264 2.9
59,800 Gannett Co., Inc. 364730101 GCI 27.60 1,650,480 2.8
21,500 Bristow Group Inc. 110394103 BRS 75.52 1,623,680 2.8
46,800 International Speedway Corp. 460335201 ISCA 33.99 1,590,732 2.7
25,700 Charles River Laboratories Intl Inc. 159864107 CRL 60.34 1,550,738 2.7
11,200 Mohawk Industries, Inc. 608190104 MHK 135.98 1,522,976 2.6
14,900 Dun & Bradstreet Corp. 26483E100 DNB 99.35 1,480,315 2.5
30,700 Contango Oil & Gas Co. 21075N204 MCF 47.74 1,465,618 2.5
21,800 Bally Technologies Inc. 05874B107 BYI 66.27 1,444,686 2.5
19,900 Zebra Technologies Corp. 989207105 ZBRA 69.41 1,381,259 2.4
12,000 Snap-On Inc. 833034101 SNA 113.48 1,361,760 2.3
45,500 Newell Rubbermaid Inc. 651229106 NWL 29.90 1,360,450 2.3
23,400 Fair Isaac Corp. 303250104 FICO 55.32 1,294,488 2.2
9,925 Bio-Rad Laboratories, Inc. 090572207 BIO 128.12 1,271,591 2.2
27,000 Meredith Corp. 589433101 MDP 46.43 1,253,610 2.2
29,560 DeVry Education Group Inc. 251893103 DV 42.39 1,253,048 2.2
15,900 City National Corp. 178566105 CYN 78.72 1,251,648 2.2
1,600 Graham Holdings Co. 384637104 GHC 703.75 1,126,000 1.9
11,400 J.M. Smucker Co. 832696405 SJM 97.24 1,108,536 1.9
30,600 Simpson Manufacturing Co., Inc. 829073105 SSD 35.33 1,081,098 1.9
37,600 Brady Corp. 104674106 BRC 27.15 1,020,840 1.8
13,275 IDEX Corp. 45167R104 IEX 72.89 967,615 1.7
84,700 Symmetry Medical Inc. 871546206 SMA 10.06 852,082 1.5
13,800 Madison Square Garden Co. 55826P100 MSG 56.78 783,564 1.3
7,800 Laboratory Corp. of America Holdings 50540R409 LH 98.21 766,038 1.3
11,100 MTS Systems Corp. 553777103 MTSC 68.49 760,239 1.3
  Cash Balance CASH CASH-1 1.00 641,198 1.1
30,600 Interface, Inc. 458665304 TILE 20.55 628,830 1.1
13,400 Sotheby's 835898107 BID 43.55 583,570 0.9
7,800 Nordstrom, Inc. 655664100 JWN 62.45 487,110 0.7
6,100 McCormick & Co., Inc. 579780206 MKC 71.74 437,614 0.7
Grand Total     $58,189,559 100.0%  

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 Small/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 Small/Mid Cap Value (Representative Portfolio)

Sector Weightings (%)

As of March 31, 2014
  Ariel Small/Mid Cap Value Russell 2500 Value Russell 2500 S&P 500
Consumer Discretionary 32.74 10.90 15.15 13.81
Financial Services 32.38 37.99 25.10 17.85
Producer Durables 12.36 13.68 15.29 10.98
Health Care 11.02 5.00 10.61 13.20
Technology 3.30 8.51 11.82 16.04
Materials and Processing 2.97 6.53 8.28 3.93
Consumer Staples 2.69 1.54 2.42 8.49
Energy 2.55 6.84 5.84 10.18
Utilities 0.00 9.01 5.49 5.52



Represents percentage of total equity holdings in the representative portfolio


Ariel Small/Mid Cap Value (Representative Portfolio)

Portfolio Characteristics

As of March 31, 2014
  Market Capitalization Ariel Small/Mid Cap Value Russell 2500 Value Russell 2500 S&P 500
Market Capitalization (In billions)        
Large Capitalization 76.77 & Above 0.0 0.0 0.0 46.8
Medium/Large Capitalization 23.15 -- 76.77 0.0 0.0 0.0 32.2
Medium Capitalization 7.83 -- 23.15 20.5 6.0 7.4 18.5
Medium/Small Capitalization 3.06 -- 7.83 44.4 48.8 50.6 2.6
Small Capitalization 3.06 & Below 35.1 45.2 42.0 0.0
Dollar-Weighted Average (BIL)*   $4.10 $2.77 $2.99 $67.79
Valuation Metrics  
Forward Price/Earnings   16.1 16.6 18.2 16.0
Trailing Price/Earnings   22.4 23.6 27.5 18.6
Discount to Private Market Value   -11.8 n/a n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth **   11.1 10.1 12.9 11.1
Interest Coverage Ratio   7.1 4.5 5.3 8.5
Portfolio Construction  
Number of Holdings   41 1,733 2,495 500
Turnover   19.3 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 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2500 of the smallest securities based on a combination of their market cap and current index membership. 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.