Ariel Investments Portfolio Manager Tim Fidler details his year end review and 2019 outlook as co-portfolio manager for Ariel Appreciation Fund.
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Question: As we head into 2019, what do you feel is the biggest threat facing the markets?
Answer: The lack of clarity surrounding trade policy has without question has weighed on markets and weakened confidence with respect to overall economic health. More generally, the lack of predictability out of our governmental institutions has affected markets globally, most acutely in the case of Brexit. Management teams cannot reasonably plan, and more importantly, invest for growth without some realistic view regarding terms of trade and input costs. As management confidence goes, investor conviction usually follows.
Question: As an investor, what keeps you awake at night?
Answer: The most vexing question we face is where we are in the economic cycle? Macroeconomic vital signs have been difficult to read throughout most of the post-GFC recovery as traditional economic relationships have been somewhat unreliable due to the unusually low interest rate environment we have experienced. As bottom-up, fundamental investors we focus on what our companies are telling us through their performance and view of their prospects rather than read the economic tea-leaves and that has served us well this cycle. We have remained bullish on the economy throughout the recovery – and remain constructive — yet we are fully aware that all good things come to an end at some point.
Question: With the heightened volatility in the markets and recent sharp selloff, how do you maintain a long-term perspective?
Answer: Stock prices have always been more volatile than the business values underlying them and this recent period is no different. By focusing on company fundamentals, valuations, and a view of what the business will look like five or ten years out has always been our compass and remains so. In the short-run, anything can happen. However, over the long-run stock prices have tended to follow and converge to the intrinsic values of the businesses from which they are derived. To the extent that they do not in the short-run, that creates opportunities for us.
Question: Have you made any significant changes to your investment strategy in the final quarter of the year?
Answer: No, we employ a fairly timeless approach. While we are always looking for ways to improve and prevent making the same mistakes twice, the process is stable and not subject to change as market conditions change. One attribute we are focused on now, however, is portfolio balance. Although financial markets have been volatile, they are not at extremes with respect to valuations, sentiment, or fundamentals. To that end, there is no reason to position the portfolio as such. As markets continue to bounce violently from risk-seeking to risk-avoidance we are looking to smooth the ride a bit by maintaining balance across our new ideas, maturing investment theses, and harvesting our winners from the recovery.
Question: Given your outlook for 2019, in general, what sectors are you most bullish about? What sectors will you seek to avoid?
Answer: Industrials have been hit hard by the fears of a global trade war. There are many world class, industry leading industrial companies that are pricing in a fairly dire outlook and are on sale, in our opinion. The same holds for financial services. Branded, low capital intensity financial services businesses have been caught up in yet another market mood swing concerning the interest rate environment and trading weakly at the moment.
The pure defensive sectors such as utilities, REITS, and consumer staples remain overvalued in our estimation. They serve as the go-to exposures during periods of heightened volatility and are bought without much consideration of longer term valuation. At these prices, they do not make sense for investors with long-term time horizons.
Question: Are there any particular sectors in which you are currently overweight, versus your benchmark?
Answer: Per usual, we are overweight the broad consumer and financial sectors which have served as our true ‘power alleys’ over the 35 year history of the firm. Here we can find growing, differentiated, competitively advantaged quality companies that serve as the foundation of our investment approach.
Industrials are an area of focus for us due to the aforementioned fears around global fear. Additionally, over the years we have built up real expertise in the health care sector led by our longtime analyst Sabrina Carollo. As the sector has slowly re-rated into value territory over the last decade we have had meaningful investments in health care and remain overweight in the area.
Question: Are there any particular sectors in which you are currently underweight?
Answer: As noted above, utilities, REITS, staples, are simply too overpriced to currently consider for purchase. That said, the consumer staple area which had been a material contributor to Ariel’s early years is starting to come back into a valuation range that makes more sense to us and investors struggle with the outlook for branded consumer products in a post-Amazon world.
Materials, deep cyclicals, and the larger commodity complex remain structural underweights for us. It’s a tough task to find Ariel-type businesses in these areas and we eschew the trading nature of investing in these types of companies.
Tech is a bit of a special case. There are times when we can find great businesses on sale such as the post-TMT crash in 2001-2002. Unfortunately, this is not one of those periods as the technology area has been richly valued for some time. While we are able to find underfollowed stocks such as Keysight Technologies (KEYS) from time to time, is has been difficult to find new ideas in this space at attractive prices.
Question: When you consider investment opportunities that have been overvalued this year—for example, the FANG stocks, what do you consider to be overlooked opportunities?
Answer: Increasingly we are finding more and more classic, deeper value opportunities present themselves. Stocks with highly idiosyncratic issues that investors have thrown into the ‘too hard’ pile. Examples in our current portfolio would be Mattel (MAT) and Stericycle (SRCL). Of late, the investing environment has been increasingly defined by various risk factors such as momentum, profitability, etc. and these types of stocks are difficult to define simply by a few simple risk factors.
Question: What advice is foremost in your mind at present that you would give to investors?
Answer: Investing is not trading pieces of paper or speculating on trends. Long term investing is about owning pieces of real businesses. Get the business right and the stock will eventually follow. It may take some time, but if you are patient, it can serve as a wonder competitive advantage.
The information contained in these investment perspectives is not guaranteed as to its accuracy or completeness. The opinions expressed were current at the time of publication but are subject to change. The information provided in this reprint 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 security.
Mr. Fidler candidly discusses his viewpoints of market conditions and certain specific companies. Mr. Fidler discusses a number of stocks held in Ariel Fund and Ariel Appreciation Fund at the time the perspectives were written. These stocks do not represent all of the holdings in the Funds. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of the other holdings of the Funds or of the Fund itself. See current holdings information for Ariel Fund by clicking here. See current holdings information for Ariel Appreciation Fund by clicking here.
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.
by Tim Fidler: