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Invaluable Insights Part III: What's Next – Recap



TO:

Clients and Friends of Ariel Investments, LLC

FROM:

Mellody Hobson, Co-CEO and President

DATE:

March 7, 2022

RE:

Invaluable Insights Part III: What’s Next – Recap




Last week, we hosted the third installment of “Invaluable Insights,” a virtual gathering of legendary value investors from Ariel Investments, Artisan Partners, GAMCO Investors, Harris Associates, Miller Value Partners and Southeastern Asset Management.


With an average tenure of 35 years and over $350 billion in collective assets under management, this group represents some of the most successful value investors in history.



During this spirited and timely conversation, we discussed the following trends:


Value managers see opportunity where others see challenges:

  • Managers are leaning into market volatility—buying shares of companies with strong fundamentals that have been overly punished by the market.

  • Everyone agreed: fundamentals matter most. The underlying value of a business is where the opportunity is, not the current market noise or price.

  • For those with the patience to withstand aggressive market moves, there are plenty of high-quality businesses to own.

  • Staley Cates does not think inflation is transitory, due to wage inflation, though he acknowledges it is hard to say whether it is permanent either.


Worried about inflation:

  • The group expects the Fed to take a more aggressive stance, predicting between 4-6 rate rises this year alone.

  • As a result, these bottom-up stock pickers are diversifying holdings, with a bias towards companies with pricing power.

  • Inflation will also test corporate leaders—especially the heads of domestic companies who have never managed their businesses in an inflationary environment.


Impact of Ukraine invasion:

  • The biggest risk the Ukraine situation poses to markets is a European recession, which the group believes will be driven by an energy shock.

  • Investors agreed that Russia will remain largely un-investable while the world is united against the country.

  • Mario Gabelli noted that while investors may be forced to walk away from Russian securities, he sees upside for some companies such as those operating wireless communications in Ukraine and Russia.


Regulation in China foreshadows:

  • Some managers suggested China is ahead of the curve when it comes to regulating its technology industry—pointing to signs that the U.S. has already begun making similar moves.

  • Rupal Bhansali stated, “China is ahead of the game, and the rest of the world will follow.”

  • Managers agreed that the elevated risk premium on Chinese securities is warranted given the regulatory environment.


Sector calls:

  • There was widespread enthusiasm for the travel and leisure sector, where the value gurus see tremendous pent-up demand.
    • Dan O’Keefe noted holdings in Expedia, which he said provides built-in inflation protection due to limited labor costs, while Bill Miller cited Norwegian Cruise Line, Delta Air Lines and United Airlines.

  • Energy, on the other hand, received a unanimous “sell” rating given the current price of oil.

  • Further consolidation in the media industry is believed to be inevitable, with managers who own names like Paramount Global and Discovery predicting 3-4 eventual “big winners” in the category.

  • Within financials, there was no doubt that the recent surge in private equity investing has altered public equity investing.
    • After a “ten-year draught,” David Herro believes now is the time to gain exposure to European financials.


Lightening round stock picks:

  • Meta or Microsoft? Most favored Microsoft, with only Daniel O’Keefe and Bill Miller “buying” Meta. Mario Gabelli chose neither.

  • Walmart or Amazon? The group was split, with Bill Miller, Daniel O’Keefe and Mario Gabelli choosing Amazon, and the rest choosing Walmart.

  • Disney or Discovery? Again, the group was split. Mario Gabelli, John W. Rogers, Jr. and Daniel O’Keefe “bought” Disney; Staley Cates and Bill Miller went with Discovery; and Rupal Bhansali and David Herro chose neither.



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.




 
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