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.
Investor Class: 06/30/2005
Institutional Class: 12/30/2011
Investor Class: ARFFX
Institutional Class: AFOYX
$44.5 million as of 6/30/2016
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 (40% discount to PMV) 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
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.
High Quality Value Investing
Ariel Focus Fund (Investor Class)Performance
| Inception date: June 30, 2005 | Annualized | |||||||
| One Month |
Three Months |
Year To Date |
One Year |
Three Years |
Five Years |
Ten Years |
Since Inception |
|
|---|---|---|---|---|---|---|---|---|
| Ariel Focus Fund | 1.71% | 6.44% | 13.12% | 7.20% | 5.89% | 9.80% | 5.12% | 4.94% |
| Russell 1000® Value Index | 0.77% | 4.59% | 10.23% | 12.92% | 10.69% | 14.39% | 6.08% | 6.90% |
| S&P 500® Index | 0.14% | 4.10% | 7.82% | 12.55% | 12.30% | 14.69% | 7.51% | 7.78% |
Ariel Focus Fund (Investor Class)Performance
| Inception date: June 30, 2005 | Annualized | |||||||
| One Month |
Three Months |
Year To Date |
One Year |
Three Years |
Five Years |
Ten Years |
Since Inception |
|
|---|---|---|---|---|---|---|---|---|
| Ariel Focus Fund | -0.90% | 3.65% | 5.32% | -8.14% | 4.45% | 6.43% | 4.31% | 4.34% |
| Russell 1000® Value Index | 0.86% | 4.58% | 6.30% | 2.86% | 9.87% | 11.35% | 6.13% | 6.66% |
| S&P 500® Index | 0.26% | 2.46% | 3.84% | 3.99% | 11.66% | 12.10% | 7.42% | 7.53% |
Net Expense Ratio as of the fiscal year ended 9/30/15: 1.00%*
Gross Expense Ratio as of the fiscal year ended 9/30/15: 1.37%*
*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 Focus Fund's total annual operating expenses to 1.00% 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 1.25% for the Investor Class.
Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment. 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 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 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 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.
Schedule of Holdings
| Shares | Security Description | Ticker | Current Value ($) | % of Net Assets | |
|---|---|---|---|---|---|
|
Top Ten Equity Holdings
|
|||||
| 22,600 | Stanley Black & Decker, Inc. | SWK | 2,513,572 | 5.7 | |
| 59,100 | Oracle Corp. | ORCL | 2,418,963 | 5.4 | |
| 15,900 | International Business Machines Corp. | IBM | 2,413,302 | 5.4 | |
| 9,400 | Lockheed Martin Corp. | LMT | 2,332,798 | 5.2 | |
| 121,200 | Western Union Co. | WU | 2,324,616 | 5.2 | |
| 19,000 | Zimmer Biomet Holdings, Inc. | ZBH | 2,287,220 | 5.1 | |
| 16,900 | Laboratory Corp. of America Holdings | LH | 2,201,563 | 5.0 | |
| 24,000 | St. Jude Medical, Inc. | STJ | 1,872,000 | 4.2 | |
| 70,050 | Morgan Stanley | MS | 1,819,899 | 4.1 | |
| 85,082 | Barrick Gold Corp. | ABX | 1,816,501 | 4.1 | |
| 19,000 | Exxon Mobil Corp. | XOM | 1,781,060 | 4.0 | |
| 48,600 | National Oilwell Varco | NOV | 1,635,390 | 3.7 | |
| 132,300 | KKR & Co. L.P. | KKR | 1,632,582 | 3.7 | |
| 61,000 | Mosaic Co. | MOS | 1,596,980 | 3.6 | |
| 9,800 | Goldman Sachs Group, Inc. | GS | 1,456,084 | 3.3 | |
| 23,200 | JPMorgan Chase & Co. | JPM | 1,441,648 | 3.2 | |
| 45,300 | BorgWarner Inc. | BWA | 1,337,256 | 3.0 | |
| 10,700 | Johnson & Johnson | JNJ | 1,297,910 | 2.9 | |
| 32,700 | Bank of New York Mellon Corp. | BK | 1,270,395 | 2.9 | |
| 36,800 | Progressive Corp. | PGR | 1,232,800 | 2.8 | |
| 21,900 | Apache Corp. | APA | 1,219,173 | 2.8 | |
| 27,800 | Bed Bath & Beyond Inc. | BBBY | 1,201,516 | 2.7 | |
| 22,400 | Microsoft Corp. | MSFT | 1,146,208 | 2.6 | |
| 46,500 | Kennametal Inc. | KMT | 1,028,115 | 2.3 | |
| 19,100 | Anixter Intl Inc. | AXE | 1,017,648 | 2.3 | |
| 139,000 | Pier 1 Imports, Inc. | PIR | 714,460 | 1.6 | |
| 12,900 | Zebra Technologies Corp. | ZBRA | 646,290 | 1.5 | |
| 68,600 | Hanger, Inc. | HGR | 509,698 | 1.1 | |
| Cash, Other Assets and Liabilities | 294,603 | 0.6 | |||
| Grand Total | $44,460,250 | 100.0% | |||
Sector Weightings (%)
| Ariel Focus Fund | Russell 1000 Value | S&P 500 | |
|---|---|---|---|
| Financial Services | 25.31 | 27.94 | 17.79 |
| Health Care | 18.49 | 11.33 | 14.63 |
| Technology | 15.84 | 9.13 | 16.88 |
| Producer Durables | 14.76 | 9.62 | 10.54 |
| Energy | 10.50 | 13.62 | 7.42 |
| Materials and Processing | 7.73 | 3.04 | 3.06 |
| Consumer Discretionary | 7.37 | 5.83 | 13.67 |
| Utilities | 0.00 | 11.47 | 6.54 |
| Consumer Staples | 0.00 | 8.02 | 9.46 |
Represents percentage of total equity holdings in the portfolio
Portfolio Characteristics
| Ariel Focus Fund | Russell 1000 Value | S&P 500 | |
|---|---|---|---|
| Market Capitalization (In billions) | |||
| Large Capitalization (88.65 & Above) | 23.8% | 41.4% | 47.9% |
| Medium/Large Capitalization (24.85 -- 88.65) | 19.7% | 27.4% | 31.7% |
| Medium Capitalization (7.99 -- 24.85) | 38.2% | 19.7% | 18.0% |
| Medium/Small Capitalization (2.90 -- 7.99) | 9.4% | 10.3% | 2.3% |
| Small Capitalization (2.90 & Below) | 8.9% | 1.2% | 0.0% |
| Dollar-Weighted Average (BIL)1 | 26.84 | 53.69 | 75.57 |
| Valuation Metrics2 | |||
| Forward Price/Earnings | 14.5 | 16.1 | 17.3 |
| Trailing Price/Earnings | 26.3 | 19.2 | 20.7 |
| Discount to Private Market Value | -16.8 | n/a | n/a |
| Fundamentals | |||
| 5 Yr. Estimated Earnings Growth3 | 9.2 | 9.1 | 10.9 |
| Interest Coverage Ratio4 | 7.4 | 6.0 | 7.9 |
| Return on Equity5 | 12.3 | 12.6 | 17.3 |
| Number of Holdings5 | 28 | 692 | 505 |
| Benchmark Sensitive Statistics | |||
| Turnover | 20.9 | n/a | n/a |
| Active Share6 | 87.52 | n/a | n/a |
| Beta vs. S&P 500 (5-year)7 | 1.13 | 1.02 | 1.00 |
| Current Beta8 | 1.05 | 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 Price/Earnings data source: BNY Mellon. 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.
3 This indicates the consensus outlook for a portfolio's EPS growth. I/B/E/S provides medians of research analysts' estimates for companies' long-term growth rates. Only stocks with at least three estimates in the I/B/E/S database are included; medians are less useful with fewer estimates, and research coverage may be less current. This measure is not a forecast of the Fund's performance. Source: BNY Mellon
4 This characteristic measures companies' ability to pay interest expense with current profits. Source: BNY Mellon
5 Source: BNY Mellon
6 Active Share measures the degree of active management by a portfolio manager. Source: FactSet
7 5-year beta is generated internally. Source: Zephyr Style Advisor
8 Current beta (1-year trailing) is generated internally through FactSet and is based on daily security returns.
See the Glossary for definitions of terms not defined above.
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 large cap U.S. equities. It includes 500 leading companies.
Commentary
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