Deep Value Strategy
Ariel Discovery Fund

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.

Key Facts
Market Cap Range: under $2 billion
Inception:
Investor Class: 01/31/2011
Institutional Class: 12/30/2011
Number of holdings: 25-45
Turnover: 20-50%
Ticker Symbol:
Investor Class: ARDFX
Institutional Class: ADYIX
Fund Assets (all classes):
$32.7 million as of 6/30/2016
 
Portfolio Managers
Maley_David_web.png David M. Maley
Lead Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Portfolio Manager
 
Fund Spotlight
Portfolio Manager David Maley is listed as a MicroCap Superstar among an elite group of investment professionals.
An in-depth interview with Portfolio Manager David Maley.
 

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

 
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David Maley on
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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 (deep discount to intrinsic worth, fortress balance sheets and excess cash) 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



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.


Investor Class
Institutional Class
Quarter End
Month End

Ariel Discovery Fund (Investor Class)Performance

As of July 31, 2016
Inception date: January 31, 2011 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Since
Inception
Ariel Discovery Fund 5.53% 3.42% 7.20% -9.90% -8.19% 1.16% 0.08%
Russell 2000® Value Index 5.40% 7.65% 11.81% 5.59% 6.01% 10.03% 9.14%
Russell 2000® Index 5.97% 8.29% 8.32% 0.00% 6.74% 10.43% 9.96%
S&P 500® Index 3.69% 5.82% 7.66% 5.61% 11.16% 13.38% 12.40%

Ariel Discovery Fund (Investor Class)Performance

As of June 30, 2016
Inception date: January 31, 2011 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Since
Inception
Ariel Discovery Fund -0.83% -0.60% 1.59% -20.78% -7.87% 0.10% -0.91%
Russell 2000® Value Index 0.30% 4.31% 6.08% -2.58% 6.36% 8.15% 8.23%
Russell 2000® Index -0.06% 3.79% 2.22% -6.73% 7.09% 8.35% 8.95%
S&P 500® Index 0.26% 2.46% 3.84% 3.99% 11.66% 12.10% 11.85%
Expense Cap as of 2/1/14: 1.25%*
Net Expense Ratio as of the fiscal year ended 9/30/15: 1.25%*
Gross Expense Ratio as of the fiscal year ended 9/30/15: 2.10%*

*Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the "Expense Cap") in order to limit Ariel Discovery Fund's total annual operating expenses to 1.25% of net assets for the Investor Class through the end of the fiscal year ending September 30, 2017. The Expense Cap prior to February 1, 2014 was 1.50% for the Investor Class.

Investing in small/micro-cap stocks is more risky and volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

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. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 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 large cap U.S. equities. It includes 500 leading companies.

Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current summary prospectus or full prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or click here. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC.

Ariel Discovery Fund

Sector Weightings (%)

As of June 30, 2016
  Ariel Discovery Fund Russell 2000 Value Russell 2000 S&P 500
Consumer Discretionary 28.89 10.89 14.30 13.67
Technology 22.79 9.72 14.29 16.88
Financial Services 13.75 41.32 26.45 17.79
Producer Durables 13.00 12.53 13.17 10.54
Utilities 8.73 8.46 5.44 6.54
Energy 6.08 4.81 2.83 7.42
Materials and Processing 4.27 5.32 7.13 3.06
Health Care 2.48 4.58 13.53 14.63
Consumer Staples 0.00 2.36 2.86 9.46

Represents percentage of total equity holdings in the portfolio



Ariel Discovery Fund

Portfolio Characteristics

As of June 30, 2016
  Ariel Discovery Fund Russell 2000 Value Russell 2000 S&P 500
Market Capitalization (In billions)  
$1.00 & Above 8.0% 67.3% 72.7% 100.0%
$0.50 - $1.00 16.6% 17.8% 16.0% 0.0%
$0.25 - $0.50 18.8% 10.3% 7.9% 0.0%
$0.25 & Below 56.6% 4.5% 3.4% 0.0%
Dollar-Weighted Average (BIL)1 0.28 1.26 1.39 75.57
Key Characteristics  
Price/Book2 1.3 1.4 2.1 2.8
Discount to Private Market Value3 -40.4 n/a n/a n/a
Debt/Equity4 0.1 1.1 1.0 1.3
Cash as % of Market2 0.3 n/a n/a n/a
Number of Holdings2 39 1361 2006 505
Turnover 41.0 n/a n/a n/a
Active Share5 98.94 n/a n/a n/a


1 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. Source of Market capitalization data: BNY Mellon.
2 Source: BNY Mellon
3 Discount to Private Market Value ("PMV") represents the percentage discount at which the portfolio traded as compared to the portfolio holdings' PMV as determined by Ariel Investments.
4 This characteristic shows the relationship between holdings' debt and equity levels. Debt is defined as the sum of total long-term debt, other liabilities, deferred taxes and investment tax credits, and minority interest. Source: BNY Mellon.
5 Active Share measures the degree of active management by a portfolio manager. Source: FactSet.

See the Glossary for definitions of terms not defined above.

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. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 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 large cap U.S. equities. It includes 500 leading companies.

Ariel Discovery Fund

Commentary

 
Monthly Commentary: Perspectives on the current market
Quarterly Report: Quarterly performance update and communication to investors
Fact Sheets: Quarterly overview of fund objectives and performance summary
Ariel Discovery Fund

Schedule of Holdings

As of June 30, 2016
Shares Security Description CUSIP Ticker Current Value ($) % of Net Assets
Top Ten Equity Holdings
181,286 ORBCOMM, Inc. 68555P100 ORBC 1,803,796 5.5
226,132 Gaiam, Inc. 36268Q103 GAIA 1,750,262 5.3
224,874 Rosetta Stone Inc. 777780107 RST 1,742,773 5.3
393,900 RealNetworks, Inc. 75605L708 RNWK 1,697,709 5.2
523,718 Cowen Group, Inc. 223622101 COWN 1,550,205 4.7
52,099 Team, Inc. 878155100 TISI 1,293,618 4.0
109,800 Brooks Automation, Inc. 114340102 BRKS 1,231,956 3.8
190,057 Century Casinos, Inc. 156492100 CNTY 1,184,055 3.6
67,702 XO Group Inc. 983772104 XOXO 1,180,046 3.6
211,440 Telenav Inc. 879455103 TNAV 1,078,344 3.3
21,800 First American Financial Corp. 31847R102 FAF 876,796 2.7
80,631 Landec Corp. 514766104 LNDC 867,590 2.7
1,716,312 Pendrell Corp. 70686R104 PCO 865,879 2.6
115,100 Gulf Island Fabrication, Inc. 402307102 GIFI 798,794 2.4
214,385 Kindred Biosciences, Inc. 494577109 KIN 758,923 2.3
28,100 Superior Industries Intl, Inc. 868168105 SUP 752,518 2.3
118,825 Spartan Motors Inc. 846819100 SPAR 743,844 2.3
156,880 PCTEL, Inc. 69325Q105 PCTI 738,905 2.3
58,354 Contango Oil & Gas Co. 21075N204 MCF 714,253 2.2
221,800 SeaChange Intl, Inc. 811699107 SEAC 707,542 2.2
61,200 Bristow Group Inc. 110394103 BRS 698,292 2.1
104,200 Skullcandy Inc. 83083J104 SKUL 639,788 2.0
45,600 Capital Southwest Corp. 140501107 CSWC 623,352 1.9
77,300 Real Industry Inc. 75601W104 RELY 600,621 1.8
22,500 CRA International, Inc. 12618T105 CRAI 567,450 1.7
15,200 MB Financial, Inc. 55264U108 MBFI 551,456 1.7
422,090 Imation Corp. 45245A107 IMN 527,612 1.6
15,200 International Speedway Corp. 460335201 ISCA 508,440 1.6
187,300 Glu Mobile Inc. 379890106 GLUU 412,060 1.3
38,138 Digi International Inc. 253798102 DGII 409,221 1.3
14,100 Brink's Co. 109696104 BCO 401,709 1.2
45,500 West Marine, Inc. 954235107 WMAR 381,745 1.2
16,500 Movado Group Inc. 624580106 MOV 357,720 1.1
92,500 Mitcham Industries, Inc. 606501104 MIND 346,875 1.1
8,200 Strattec Security Corp. 863111100 STRT 334,314 1.0
288,191 Orion Energy Systems, Inc. 686275108 OESX 334,302 1.0
16,600 ArcBest Corp. 03937C105 ARCB 269,750 0.8
28,100 Electro Scientific Industries, Inc. 285229100 ESIO 164,104 0.5
2,573 Simpson Manufacturing Co., Inc. 829073105 SSD 102,843 0.3
  Cash, Other Assets and Liabilities     2,126,708 6.5
Grand Total   $32,696,170 100.0%  

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. The Ariel mutual funds 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.

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