Share  |  Print
Investment Perspectives with David Maley

Ariel Investments Portfolio Manager David Maley answered questions about risk. David is the Portfolio Manager for the following Deep Value Strategies: Ariel Micro-Cap Value and Ariel Small Cap Deep Value. Read the full Q&A below.

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 we invest may never be recognized by the broader market.

Question: How do you define risk? 

Answer: I define risk as the possibility of permanent impairment of capital.

Question: How do you think about risk?

Answer: : The Ariel deep value strategies seek to find investment opportunities with a potentially sizable margin of safety*, which we define as the difference between the intrinsic value of a stock and the market’s current price.

Question: What are, in your opinion, the most important factors to consider when evaluating risk?

Answer: We believe that certainty of underlying asset value is the most important factor to consider when evaluating risk. In addition, management can make a decision that leads to permanent impairment of capital. Thus we focus on identifying companies with strong, properly incentivized leadership.

Question: Is there a way to measure risk?  What types of risk metrics do you employ?

Answer: It is difficult to measure risk or quantify risk in our world. The factors that impact risk are the value of the underlying assets and the decisions made by management that could impact asset value. We focus on understanding those factors, rather than honing in on one specific metric.

Question: At what point is risk a consideration in the value process?

Answer: We are constantly considering the risk of any given investment. We pay particularly close attention to risk when deciding to initiate a position and after management has made a decision that could impact the underlying asset value of a company.

Question: Do the moat ratings or debt ratings factor in your risk analysis?

Answer: The companies that we own typically do not have meaningful debt and they tend to have excess cash. Moat ratings are rarely applicable in small and micro-cap asset-based investments.

Question: What does a margin of safety mean to you?  How does a margin of safety mitigate risk in the portfolio?

Answer: It means investing where we can be wrong about a company, but right as investors.

Question: How does the “Devil’s Advocate” analyst fit in your evaluation of company risk?

Answer: The Deep Value team participates in weekly meetings, and although we do not have a formal “devil’s advocate,” at these meetings, analysts and portfolio managers discuss, debate, and defend investments. We have cultivated an environment that encourages communication and risk monitoring.

Question: Do you have an ongoing risk monitoring process once an investment is selected for the portfolio?

Answer: We are constantly monitoring the risks of each individual investment. It is a dynamic process that impacts portfolio construction. We determine position size based on our estimate of the discount to fair value and our conviction levels. If the discount to fair value changes, we will adjust the position size accordingly.

*Attempting to purchase within a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimates on our part, declining fundamentals, nor external forces.

Products Managed
by David Maley:
Ariel Micro-Cap Value Separate Account
Ariel Small Cap Deep Value Separate Account
Past performance does not guarantee future results. © Ariel Investments, LLC. This website and all of its content is for informational and educational purposes only and should not be considered to be investment advice or a recommendation to buy or sell any particular security. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC. Use of this website is subject to our Terms & Conditions. 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 ineligible investors, investors for whom such products, funds or services are not suitable, or investors outside the United States.

Check the background of this firm on FINRA's BrokerCheck
Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation