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Investment Perspectives with John Rogers

Ariel Investments Chairman, Co-CEO & Chief Investment Officer John W. Rogers, Jr. answered questions about active portfolio management. John is the Portfolio Manager for the following Value Strategies: Ariel Fund, Ariel Appreciation Fund, Ariel Small Cap Value, Ariel Small Cap Value Concentrated, Ariel Small/Mid Cap Value and Ariel Mid Cap Value. Read the full Q&A below.

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 Fund invests may never be recognized by the broader market. Ariel Fund is often concentrated in fewer sectors than its benchmark, and its performance may suffer of these sectors underperform the overall stock market.

Question: How has the active versus passive debate affected managers such as yourself?

Answer: We haven't seen this much pressure to move towards passive investing in a long time. However, in recent conversations I have had with my colleagues, we all agree that the active investing community has not done enough work to push back against the prevailing attitude that passive investing is the "new normal."

I think active investing will always have a place in America. We’re a competitive people and we enjoy winning. And if you’re a passive investor, you’re never going to win. You’re always going to be average, and I don’t think that’s what makes America great. I’m a competitor. I’m a fighter. I believe there is a place for active management in everyone’s portfolio if you have the time to do the homework and determine which portfolio managers you want to choose. That said, we understand that active and passive management go through cycles, and there are going to be times when passive managers look brilliant, and other times when active managers look brilliant. Because active managers have underperformed for quite a long time, people are giving up on active management. Being contrarians and watching these cycles over the last thirty five years, I’m convinced that we’re at a cycle where active management will return to favor, and active managers, I think, will outperform over the next ten years. So, I think it’s a great place to be.

Even Jack Bogle, the creator of the first index mutual fund more than 30 years ago, believes that active management may have its day in the sun in the near future. Speaking at the Morningstar Conference last summer, Bogle said once a true fiduciary strategy takes hold as the norm among active managers, fees will naturally decline; disciplined, long-term investing will reign; and the fund-management industry will go back to its origins of, "We sell what we make," instead of the present policy of "We make what will sell."

Over the long run, it’s not unlike every other field, where there is going to be a handful of people who are really, truly good at this. For example, Warren Buffett always used to recommend Bill Ruane from the Sequoia Fund as someone he knew was an outstanding active manager. There are people out there who have that gift — that talent to pick stocks: the same way there are great musicians who can write great songs, great athletes who can lead winning teams, and great business leaders who can run great businesses and invent great new products, whether it’s a John Johnson or a Steve Jobs. It’s the same with active managers. There are active managers out there who have talent, who have creativity, and who have the gift to pick stocks; and over the years, I’ve had the opportunity to get to know a lot of those great active managers and they’ve been able to demonstrate, over time, they can outperform. And it’s not just Warren Buffett — it’s people like Ralph Wanger, Bill Miller, Mario Gabelli, Tom Russo, and Ron Baron — people whom I’ve been able to watch over the years continually outperform even when they’re inevitably going to have a few downturns along the way. These managers bounce back strongly because of their gifts and their abilities to be effective active managers.

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), 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?

Answer: I have continued to fish in exactly the same fishing pond, because I have found that the best way for me to be able to be a successful investor is to focus on that part of the universe I feel that we have the most amount of experience with, have exceptional knowledge of, and as Warren Buffett would say, is within our circle of competence.

Question: What makes your fund different?

Answer: Ariel Fund is different because it’s entirely focused on small and mid-sized, undervalued companies. And that’s what I really love to do: to go out and find those companies that are undiscovered and selling at bargain prices. In fact, that’s the entire focus of our Chicago office. All of us here are working in that same area of small and mid-sized companies, looking for bargains, looking for those rare gems, and keeping a very concentrated portfolio.

The second thing that’s important about Ariel Fund is that it’s very concentrated. We are going to own forty stocks or fewer, and we’re not going to trade them very often. We are long-term, patient investors, and that is becoming exceedingly rare. Most people are fixated on what’s happening over the next three to five weeks. We’re fixated more on what’s happening over the next three to five years, and that is something that is very, very different. When we visit with management teams, they tell us, “Nobody’s in here talking about the long-term anymore; everyone is so short-term focused in today’s markets.”

You’ve got to be able to invest and stick with it for the long-term, to be able to believe that, over time, money compounds, and that the markets march their way forward. You’ve got to be able to believe that we overcome our problems in this country as a part of our capitalist democracy. If you look at the Dow Jones Industrial Average over the last century, it went from 66 to over 11,000, with all the challenges that we faced in the United States during that century — two World Wars, the Great Depression, two presidents assassinated, all kinds of challenges — but the markets invariably bounced back. The worst thing that an individual investor can do is bail out of the market when there are bad headlines, and then come back when the market’s booming. You’ll never be successful if you get caught up in those short-term emotions. But if you have a long-term perspective, you can be very effective.

Past performance of any security, or of the stock market in general, does not guarantee future results. Investing in equity stocks is risky and subject to the volatility of the markets. 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.

Mr. Rogers 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. Consult your financial professional and/or tax advisor 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.

Products Managed and Co-Managed by John W. Rogers, Jr.:
Ariel Small Cap Value Separate Account
Ariel Small/Mid Cap Value Separate Account
Ariel Mid Cap Value Separate Account

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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.

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Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation