This month, Ariel held its Semi-Annual Portfolio Manager Conference Call. A replay of the webcast is available here. Co-CEO & President Mellody Hobson hosted a conversation with Ariel portfolio managers on the following trends:
Outlook Amid Macro Challenges and Risks Ahead
- Many clients asked about our outlook for global markets against today’s headwinds. Chairman, Co-CEO & CIO John W. Rogers, Jr. is optimistic about the U.S. market and believes that value will continue to recover. He reflected on a strong earnings season when most portfolio companies reported results above expectations. He also noted that the U.S. economy looks exceedingly strong.
- Rupal Bhansali, who manages our International & Global strategies, predicts a regime change. In the current environment, she believes that the conversation is no longer about the age-old transitions we are used to: Value to Growth, Domestic to International, or Small-Cap to Large-Cap. Now, we are in an era that is best defined by a transition from Quantitative Easing to Quantitative Tightening, or “QE to QT.”
- Rupal warned listeners that unlike periods of QE, e.g., the past decade: “In a QT world, the greater the risk, the greater the penalty.”
Navigating Choppy Waters
- Just as the managers predicted during our “Invaluable Insights” panel in March 2022, Russia’s war with Ukraine has hit commodities and the European market hard. Rupal described her risk mitigation strategy: Ariel’s International & Global portfolios’ exposure to Europe is predominately in recession-resilient areas like healthcare and utilities.
- As many companies navigate margin compression from global supply chain disruptions, Tim Fidler, Co-Portfolio Manager of Ariel’s Mid Cap Value portfolios, observed some good news: demand remains strong. This means companies like the high-quality franchises we invest in – which have real pricing power – will be resilient.
- Ken Kuhrt, Co-Portfolio Manager of our Small Cap Value portfolios, agreed that fundamentals matter: “You should look for business models that can handle the shocks of short-term supply challenges and achieve longer-term return patterns.”
- When asked to compare our “playbook” from the March 2020 drawdown to more recent volatility, John reminded listeners that staying the course pays dividends. He has been buying aggressively during recent pockets of opportunity when businesses were not selling at rational rates, just as his team did in March 2020.
- Vice Chairman Charlie Bobrinskoy encouraged us to put this pessimistic period in better perspective, quoting an old joke by economist Paul Samuelson: “The stock market has predicted nine of the past five recessions.”
Our Current Positioning & What’s Next
On a year-to-date basis, Ariel’s International & Global strategies have significantly outperformed their respective primary benchmarks. Rupal identified telecommunications — a sector that her team has long argued is the new consumer staple — as a key driver.
Ken noted that our Small Cap Value portfolios have lower exposure to commodities. He cautioned that although price spikes can lead to short-term gains, they are difficult to time.
We discussed the sectors our Domestic research team is watching. John likes housing companies such as Mohawk Industries, Resideo Technologies, Inc. and ADT Inc., and entertainment and sports companies, such as Madison Square Garden Sports Corp. and Manchester United Football Club.
While Rupal and her Global team found opportunity in Latin America last year, this year she is seeing value in eclectic U.K. stocks, such as Direct Line and Japan Mabuchi Motors.
Rupal also sees additional runway for high-performing Nintendo Co., Ltd., calling the company the “Pixar of video games” for their family-friendly suite of products.
As always, thank you for your relationship with us. As we shared last week, our quarterly portfolio manager letters are now available. If you would like to be connected to a member of our team to discuss Ariel’s market outlook in more detail, please do not hesitate to reach us at [email protected].
Past performance does not guarantee future results. In this discussion, the portfolio managers at Ariel Investments and other value investing firms candidly discuss individual securities, sectors, and markets. The opinions expressed are current as of the date of the interview, but are subject to change. The information provided does not constitute information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. This material should not be considered an offer for any of the securities referenced. The information contained in the interview is not guaranteed as to its accuracy or completeness. Visit www.arielinvestments.com for holdings information by selecting a product and clicking on the “Holdings” tab.
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 portfolios invest may never be recognized by the broader market. The portfolios are often concentrated in fewer sectors than their benchmarks, and their performance may suffer if these sectors underperform the overall stock market. Investments in foreign securities may underperform and may be more volatile because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. Investments in emerging markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price. Investing in equity stocks is risky and subject to the volatility of the markets. A concentrated or focused portfolio may be subject to greater volatility than a more diversified portfolio.