Ariel Investments Portfolio Manager Charlie Bobrinskoy answered questions about active portfolio management. Charlie is the Portfolio Manager for the following Value Strategies: Ariel Focus Fund and Ariel Focused Value. Read the full Q&A below.
Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment. Investing in small- and mid-cap stocks is more risky and volatile than investing in large-cap stocks. Investing in equity stocks is risky and subject to the volatility of the markets. The intrinsic value of the stocks in which Ariel Focus Fund invests may never be recognized by the broader market. Past performance does not guarantee future results.
Question: What are your thoughts about active versus passive investment management?
Answer: The idea of passive investing goes all the way back to the 1970s and index fund development. It’s not a new idea. There are times when people get very excited about passive investing. One of those times is now, when a lot of money has been flowing into index funds. The problem is that particular kind of investing, by definition, doesn’t require any individual stock selection. It is herd investing. And right now, people are moving into the same large cap stocks in these index funds. As a result, this is producing some overvalued stocks and some undervalued stocks. I believe the more people are putting money away passively, the more opportunity there is for us, as active investors, to analyze individual companies.
Question: Can you share an example of how you add value as an active manager?
Answer: As significant amounts of money flow into passive funds, these funds buy the indices. This massive “indexing” causes huge distortions in the market. For example, passive index funds have bid up the biggest weights in the Standard & Poor’s 500 Index— stocks such as Apple Inc., (AAPL), Amazon.com Inc. (AMZN), and Microsoft Corp. (MSFT). At the same time, companies that are not in the indices have been left behind. This has created huge opportunities for us as an active manager. Three of our portfolio companies—KKR & Co. L.P. (KKR), The Blackstone Group L.P. (BX) and Lazard Ltd. (LAZ)—are examples of undervalued stocks with very attractive P/E ratios that we have purchased because they have been overlooked by the market.
Question: What should investors know about your fund that you believe is most important?
Answer: Ariel Focus Fund has historically been the most conservatively managed of all of the Ariel domestic products. I attempt to live by the mantra of, “don’t lose money,” as the first rule of investing; and my second rule of investing is, “never forget rule number one.”
I really do lie awake at night worrying about losing my own money and the money of investors who have entrusted me with their retirement income. This is money that some investors are putting their kids through college with. I take this responsibility seriously and spend a lot of time focused on downside risk, and that is a distinguishing characteristic of the Focus Fund.
When it comes to stock selection, what I’m really looking for is a sustainable, competitive, economic advantage. That’s what this is all about. If you’re investing in companies that don’t have anything that allows them to earn an excess rate of return, they’re not going to be good investments in the long run. They may have short-term rallies, and they may even benefit from some short-term noise, but I’m looking for long term sustainable competitive advantages. If you look at what we call moat ratings—which refers to how likely a company is to keep competitors at bay for an extended period—Ariel’s moat ratings are very high, and Ariel Focus Fund’s moat ratings are particularly high.
Consequently, if you can find a great company that’s experiencing some kind of short-term problem, you can find a great long-term investment opportunity. But that can cause short term volatility, so people need to know this about Ariel. We’re a firm focused on the long-term. In the short term, however, there may be a little volatility.
I view investing as a philosophy and a process of finding what the market is undervaluing. I’m taking into account the risks involved in any individual security, and then putting them together in a portfolio that gives me a good combination of long-term value opportunity with risk management. That’s what it’s all about.
Past performance does not guarantee future results. Investing in equity stocks is risky and subject to the volatility of the markets. Investing in micro-, small- and mid-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.
An actively managed portfolio is more risky than a passively managed portfolio that replicates an index because it contains fewer stocks than its benchmark index. Indices are unmanaged, and an investor cannot invest directly in an index. However, investors may invest in an index fund, which mimics the composition of an index. There are lower costs associated with index funds, as compared to actively managed funds. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.
An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces. Investing involves risk.
Mr. Bobrinskoy candidly discusses his viewpoints of market conditions and historic overview. The information contained herein is not guaranteed as to its accuracy or completeness. It should not be considered investment advice. The opinions expressed are current as of March 1, 2018, but are subject to change. The information provided herein does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or fund. It also is not meant to be individualized retirement planning or investment advice. Consult your financial professional for advice suited specifically to your individual needs.
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 Distributors, LLC is a member of the Securities Investor Protection Corporation.