Deep Value Strategy
Ariel Micro-Cap Value (closed)

Our deep value investment philosophy


Patience

We take the long-term view.
  • Three- to five-year time horizon enables us be opportunistic as short-term price dislocations arise
  • See market volatility as our friend, allowing us to buy at larger discounts and ultimately sell at larger premiums

Independence

We invest to our convictions, not to benchmarks.
  • By going against the grain, take advantage of the market's misperceptions of risk and exploit market inefficiencies
  • Remain benchmark agnostic as we build concentrated yet diversified portfolios

Expertise

We specialize in bottom-up, fundamental analysis.
  • Focus our long-term lens on the tiniest companies (which can trade at deep discounts) to uncover overlooked businesses that may present an asymmetric risk/reward opportunity
  • Evaluate corporate governance and insider ownership prior to valuation work
  • Utilize a valuation toolbox to measure the gap between stock price and intrinsic value

Teamwork

We work collaboratively with a shared commitment to excellence.
  • Draw on full team’s investment knowledge across capitalization ranges
  • Lead portfolio manager serves as special situations analyst, working alongside research team industry specialists; leveraging team insights, lead portfolio manager makes final decisions

 
DM-Deep-Value.png
David Maley on
Deep Value Investing

Why Ariel’s deep value approach


Institutional neglect of companies at the smallest end of the capitalization spectrum leads to short-term inefficiencies and, therefore, long-term opportunities.

Research matters even more among the smallest companies

Since tiny companies are often ignored by Wall Street analysts, proprietary research becomes even more critical.

Good corporate governance heavily influences positive outcomes

Companies we buy must demonstrate significant and widespread share ownership; modest salaries with long-term incentive pay; modest, stock-skewed board compensation; and talented, independent and diverse directors.

Flexible valuation methods are essential when investing in very small companies

We employ a broad range of analytical tools, avoiding the blind spots that can result from rigid valuation methodologies.

Managing risk is a top priority

We define risk as the permanent loss of capital, which we mitigate by the large margin of safety (deep discount to intrinsic worth, fortress balance sheets and excess cash) we seek in the companies we buy.

Our portfolios offer a practical alternative to private equity

While our returns resemble those of private equity funds, our portfolios have greater liquidity, better transparency and lower fees.



Margin of Safety: Attempting to purchase with a margin of safety on price cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations on our part, declining fundamentals or external forces.

Facts
Market Cap Range: generally under $500 million
Inception: July 31, 2002
Number of holdings: 24-45
Turnover: 20-50%
Assets: $280.0 million
as of 3/31/2017
 
Portfolio Managers
Maley_David_web.png David M. Maley
Lead Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Portfolio Manager
 

Our deep value process


Screening

Screen for overlooked stocks with very low prices to reduce downside risk
  • Process:
    Screen for size, valuation and financial strength, emphasizing corporate governance
  • Risk management:
    Seek companies selling at deep discounts to intrinsic worth
  • Benefit:
    Buying at such low prices substantially reduces downside risk

Bottom-up Research

Intensive, hands-on research capitalizes on institutional neglect
  • Process:
    Extensive valuation work and independent verification narrow list of ideas
  • Risk management:
    Use most suitable valuation metric when analyzing each company
  • Benefit:
    Helps us determine margin of safety between price and intrinsic value

Team Validation

Team review and debate bring additional expertise to bear
  • Process:
    Rigorous debate/discussion within research team
  • Risk management:
    Differing perspectives and backgrounds insures against groupthink
  • Benefit:
    Ideas vetted from multiple perspectives yield more informed decisions

Portfolio Construction

Concentrated portfolios constructed to drive superior returns with low volatility
  • Process:
    Build concentrated yet diversified portfolio
  • Risk management:
    Portfolio weightings reflect discounts and conviction levels; buy up to 6%, hold no more than 10% in any one security
  • Benefit:
    Long-term horizon lets us capitalize on an asymmetric risk/reward profile

Quarter End
Month End

Ariel Micro-Cap Value Composite Performance

As of May 31, 2017
Inception date: July 31, 2002 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees -0.76% 5.24% 2.05% 16.08% -5.95% 3.76% 6.81% 8.81%
Net of Fees -0.86% 4.91% 1.52% 14.65% -7.11% 2.48% 5.43% 6.65%
Russell Microcap® Value Index -2.97% -1.67% -3.01% 25.31% 7.63% 14.62% 4.46% 9.61%
Russell Microcap® Index -2.29% -0.43% -0.91% 20.59% 6.62% 14.01% 4.84% 9.37%
S&P 500® Index 1.41% 2.57% 8.66% 17.47% 10.14% 15.42% 6.94% 8.99%

Ariel Micro-Cap Value Composite Performance

As of March 31, 2017
Inception date: July 31, 2002 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees 6.16% 2.95% 2.95% 18.08% -7.73% 3.93% 6.55% 8.98%
Net of Fees 6.05% 2.63% 2.63% 16.63% -8.86% 2.64% 5.17% 6.80%
Russell Microcap® Value Index 0.35% -1.02% -1.02% 33.27% 7.02% 13.55% 5.03% 9.88%
Russell Microcap® Index 0.87% 0.38% 0.38% 27.77% 4.86% 12.43% 5.42% 9.58%
S&P 500® Index 0.12% 6.07% 6.07% 17.17% 10.37% 13.30% 7.51% 8.92%


Ariel Investments, LLC is a money management firm headquartered in Chicago, Illinois, with offices in New York and Sydney. Taking a long-term view and applying independent thinking to our investment decisions, we span the market cap spectrum from micro to large and cover the globe with our international and global offerings. Ariel claims compliance with the Global Investment Performance Standards (GIPS®).

The Micro-Cap Value strategy seeks long-term capital appreciation by investing in micro-cap companies that are selling at deep discounts to their intrinsic value. The Ariel Micro-Cap Value Composite differs from its benchmark, the Russell Microcap® Value Index, with fewer holdings concentrated in fewer sectors. Index returns reflect the reinvestment of income and other earnings. Indexes are unmanaged, and investors cannot invest directly in an index.

The performance results prior to April 30, 2009 were achieved while David Maley managed the strategy at his prior firm using a substantially similar investment style. Mr. Maley began managing this strategy at Ariel on April 30, 2009. The performance results achieved at Mr. Maley’s prior firm are linked to the performance results of the Ariel Micro-Cap Value Composite. The strategy will on occasion hold cash when values are difficult to identify. Also, the strategy at times includes temporary investments in Exchange Traded Funds (ETFs) while seeking other investment opportunities. During June 2004 through January 2008, the investment strategy included periodically holding short positions in certain ETFs. This practice may have had a material effect on returns.

All performance results of the portfolio are net of transaction costs and reflect the reinvestment of dividends and other earnings. Gross returns prior to May 2009 also are net of accounting and legal expenses. Net returns beginning May 2009 reflect the deduction of the advisory fee, which is currently 1.25% per annum. Net returns prior to May 2009 are net of a 20% incentive fee, other expenses, management fees, and profit allocations. Net performance shown has been reduced by the amount of the highest fee charged to any client during the performance period. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Fee information is available upon request and may also be found in Ariel’s Form ADV, Part 2. Results shown may be preliminary. Returns are calculated in U.S. dollars. The Ariel Micro-Cap Value Composite has been examined for the periods from August 1, 2002 through December 31, 2016. A copy of the examination report is available upon request. Past performance does not guarantee future results. Investing in micro-cap stocks is more risky and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the portfolio invests may never be recognized by the broader market. Click here to obtain a presentation that adheres to the GIPS standards.

The Russell Microcap® Value Index measures the performance of the microcap value segment of the U.S. equity market. It includes those Russell Microcap Index companies that are considered more value oriented, relative to the overall market. The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity market. It includes 1000 of the smallest securities in the small-cap Russell 2000® Index based on a combination of their market cap and current index membership. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or underlying data and no party may rely on any Russell Indexes and/or underlying data shown. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this web site. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies.

Ariel Micro-Cap Value

Commentary

 
Monthly Commentary: Perspectives on the current market
Quarterly Commentary: Quarterly performance update and communication to investors
Turtle Thoughts: A compilation of our portfolio manager letters
Fact Sheets: Quarterly product overview
Ariel Micro-Cap Value (Representative Portfolio)

Schedule of Holdings

As of March 31, 2017
Shares Security Description Ticker Market Price Market Value % of Net Assets
Top Ten Equity Holdings
317,450 Cowen Group, Inc. COWN 14.95 4,745,878 6.4
449,931 ORBCOMM, Inc. ORBC 9.55 4,296,841 5.8
420,722 Rosetta Stone Inc. RST 9.75 4,102,040 5.6
816,378 RealNetworks, Inc. RNWK 4.84 3,951,270 5.3
424,011 Century Casinos, Inc. CNTY 7.56 3,205,523 4.3
340,886 Perceptron, Inc. PRCP 8.34 2,842,989 3.8
381,168 Edgewater Technology Inc. EDGW 7.45 2,839,702 3.8
380,406 PCTEL, Inc. PCTI 7.12 2,708,491 3.7
309,610 Telenav Inc. TNAV 8.65 2,678,127 3.6
171,213 AstroNova, Inc. ALOT 15.25 2,610,998 3.5

Ariel Micro-Cap Value (Representative Portfolio)

Sector Weightings (%)

As of March 31, 2017
  Ariel Micro Cap Value Russell Microcap Value Russell Microcap S&P 500
Technology 30.95 10.93 12.81 19.12
Producer Durables 16.67 11.00 10.51 10.49
Consumer Discretionary 14.52 10.84 12.30 13.64
Financial Services 10.72 46.41 32.10 19.45
Utilities 9.28 2.19 2.43 5.58
Health Care 7.37 7.46 19.11 13.78
Materials and Processing 5.53 4.24 4.54 3.08
Energy 2.45 5.84 4.32 6.59
Consumer Staples 0.00 1.10 1.89 8.27

Represents percentage of total equity holdings in the representative portfolio



Ariel Micro-Cap Value (Representative Portfolio)

Portfolio Characteristics

As of March 31, 2017
  Ariel Micro Cap Value Russell Microcap Value Russell Microcap S&P 500
Market Capitalization (In billions)  
$1.00 & Above 0.0% 7.1% 8.0% 100.0%
$0.50 - $1.00 7.0% 42.1% 43.0% 0.0%
$0.25 - $0.50 20.7% 33.1% 30.2% 0.0%
$0.25 & Below 72.3% 17.8% 18.9% 0.0%
Dollar-Weighted Average (BIL)1 0.16 0.44 0.44 86.26
Key Characteristics  
Price/Book2 1.4 1.6 2.0 3.1
Discount to Private Market Value3 -35.8 n/a n/a n/a
Debt/Capital4 7.5 37.4 37.2 55.7
Cash as % of Market2 26.7 n/a n/a n/a
Number of Holdings2 38 1053 1492 505
Turnover5 26.0 n/a n/a n/a
Active Share6 98.48 n/a n/a n/a


1 Market capitalization is a dollar-weighted average natural log. Using the natural log of each stock's market capitalization reduces the weight given to the largest companies in a simple averaging process. Source of Market capitalization data: BNY Mellon.
2 Source: BNY Mellon
3 Discount to Private Market Value ("PMV") represents the percentage discount at which the portfolio traded as compared to the portfolio holdings' PMV as determined by Ariel Investments.
4 Debt/capital ratio is calculated by dividing debt by the sum of stockholders’ equity and debt. It is a measure of a company’s financial leverage that indicates how much debt a company has relative to its total capitalization. Source: FactSet.
5 Turnover is for the trailing 1 year period and is generated internally. Source: Fiserv APL.
6 Active Share measures the degree of active management by a portfolio manager. Source: FactSet.

See the Glossary for definitions of terms not defined above.

The Russell Microcap® Value Index measures the performance of the microcap value segment of the U.S. equity market. It includes those Russell Microcap Index companies that are considered more value oriented, relative to the overall market. The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity market. It includes 1000 of the smallest securities in the small-cap Russell 2000® Index based on a combination of their market cap and current index membership. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes or underlying data and no party may rely on any Russell Indexes and/or underlying data shown. No further distribution of Russell data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this web site. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies.


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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