Deep Value Strategy
Ariel Small Cap Deep Value

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: Under $2 billion
Inception: October 31, 2013
Number of holdings: 25-45
Turnover: 20-50%
Assets: $183.7 million
as of 6/30/2016
 
Portfolio Managers
Maley_David_web.png David M. Maley
Lead Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Portfolio Manager
 

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

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 Small Cap Deep Value Composite Performance

As of August 31, 2016
Inception date: October 31, 2013  
  One
Month
Three
Months
Year
To Date
One
Year
Since
Inception
Gross of Fees 4.08% 9.09% 11.98% -1.80% -6.63%
Net of Fees 3.99% 8.81% 11.24% -2.77% -7.55%
Russell 2000® Value Index 2.49% 8.34% 14.58% 13.80% 5.69%
Russell 2000® Index 1.77% 7.78% 10.23% 8.59% 5.77%
S&P 500® Index 0.14% 4.10% 7.82% 12.55% 10.09%

Ariel Small Cap Deep Value Composite Performance

As of June 30, 2016
Inception date: October 31, 2013  
  One
Month
Three
Months
Year
To Date
One
Year
Since
Inception
Gross of Fees -0.88% -0.66% 1.75% -20.19% -10.31%
Net of Fees -0.96% -0.91% 1.24% -20.98% -11.20%
Russell 2000® Value Index 0.30% 4.31% 6.08% -2.58% 3.03%
Russell 2000® Index -0.06% 3.79% 2.22% -6.73% 3.17%
S&P 500® Index 0.26% 2.46% 3.84% 3.99% 9.20%


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®).

This strategy seeks long-term capital appreciation by investing in small cap companies that are selling at deep discounts to their intrinsic value. The strategy will on occasion hold cash when values are difficult to identify. The Ariel Small Cap Deep Value Composite differs from its benchmark, the Russell 2000® 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.

Performance results are net of transaction costs and reflect the reinvestment of dividends and other earnings. Net returns reflect the deduction of the maximum advisory fee in effect for the respective period, which is currently 1.00% per annum. 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 Small Cap Deep Value Composite has been examined for the period from November 1, 2013 through December 31, 2015. A copy of the examination report is available upon request. Past performance does not guarantee future results. Investing in small cap stocks is more risky and 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 complete list of composite descriptions or a presentation that adheres to the GIPS standards.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies.

Ariel Small Cap Deep Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2016
  Ariel Small Cap Deep Value Russell 2000 Value Russell 2000 S&P 500
Consumer Discretionary 28.76 10.89 14.30 13.67
Technology 22.59 9.72 14.29 16.88
Financial Services 14.92 41.32 26.45 17.79
Producer Durables 12.82 12.53 13.17 10.54
Utilities 8.64 8.46 5.44 6.54
Energy 5.66 4.81 2.83 7.42
Materials and Processing 4.40 5.32 7.13 3.06
Health Care 2.20 4.58 13.53 14.63
Consumer Staples 0.00 2.36 2.86 9.46

Represents percentage of total equity holdings in the representative portfolio



Ariel Small Cap Deep Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2016
  Ariel Small Cap Deep Value Russell 2000 Value Russell 2000 S&P 500
Market Capitalization (In billions)  
$1.00 & Above 8.0% 67.3% 72.7% 100.0%
$0.50 - $1.00 16.4% 17.8% 16.0% 0.0%
$0.25 - $0.50 20.1% 10.3% 7.9% 0.0%
$0.25 & Below 55.6% 4.5% 3.4% 0.0%
Dollar-Weighted Average (BIL)1 0.28 1.26 1.39 75.57
Key Characteristics  
Price/Book2 1.4 1.4 2.1 2.8
Discount to Private Market Value3 -40.4 n/a n/a n/a
Debt/Equity4 0.1 1.1 1.0 1.3
Cash as % of Market2 0.3 n/a n/a n/a
Number of Holdings2 39 1361 2006 505
Turnover5 39.2 n/a n/a n/a
Active Share6 98.94 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 This characteristic shows the relationship between holdings' debt and equity levels. Debt is defined as the sum of total long-term debt, other liabilities, deferred taxes and investment tax credits, and minority interest. Source: BNY Mellon.
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 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights. The S&P 500® Index is the most widely accepted barometer of large cap U.S. equities. It includes 500 leading companies.


(Representative Portfolio)

Schedule of Holdings

As of June 30, 2016
Shares Security Description Ticker Market Price Market Value % of Net Assets
Top Ten Equity Holdings
306,700 Cowen Group, Inc. COWN 2.96 907,832 6.0
110,900 Gaiam, Inc. GAIA 7.74 858,366 5.7
83,700 ORBCOMM, Inc. ORBC 9.95 832,815 5.5
100,945 Rosetta Stone Inc. RST 7.75 782,324 5.2
181,000 RealNetworks, Inc. RNWK 4.31 780,110 5.2
24,556 Team, Inc. TISI 24.83 609,725 4.1
50,700 Brooks Automation, Inc. BRKS 11.22 568,854 3.8
32,500 XO Group Inc. XOXO 17.43 566,475 3.8
87,500 Century Casinos, Inc. CNTY 6.23 545,125 3.6
97,500 Telenav Inc. TNAV 5.10 497,250 3.3
39,800 Landec Corp. LNDC 10.76 428,248 2.8
10,300 First American Financial Corp. FAF 40.22 414,266 2.8
806,500 Pendrell Corp. PCO 0.51 406,879 2.7
73,800 PCTEL, Inc. PCTI 4.71 347,598 2.3
12,900 Superior Industries Intl, Inc. SUP 26.78 345,462 2.3
54,784 Spartan Motors Inc. SPAR 6.26 342,948 2.3
47,900 Gulf Island Fabrication, Inc. GIFI 6.94 332,426 2.2
104,000 SeaChange Intl, Inc. SEAC 3.19 331,760 2.2
26,900 Contango Oil & Gas Co. MCF 12.24 329,256 2.2
89,300 Kindred Biosciences, Inc. KIN 3.54 316,122 2.1
26,700 Bristow Group Inc. BRS 11.41 304,647 2.0
47,900 Skullcandy, Inc. SKUL 6.14 294,106 2.0
21,000 Capital Southwest Corp. CSWC 13.67 287,070 1.9
35,700 Real Industry Inc. RELY 7.77 277,389 1.8
10,600 CRA International, Inc. CRAI 25.22 267,332 1.8
7,000 MB Financial, Inc. MBFI 36.28 253,960 1.7
198,138 Imation Corp. IMN 1.25 247,673 1.6
7,100 International Speedway Corp. ISCA 33.45 237,495 1.6
86,100 GLU MOBILE INC. GLUU 2.20 189,420 1.3
17,600 Digi International Inc. DGII 10.73 188,848 1.3
6,600 Brink's Co. BCO 28.49 188,034 1.2
21,000 West Marine, Inc. WMAR 8.39 176,190 1.2
7,600 Movado Group Inc. MOV 21.68 164,768 1.1
3,800 Strattec Security Corp. STRT 40.77 154,926 1.0
133,000 Orion Energy Systems, Inc. OESX 1.16 154,280 1.0
40,200 Mitcham Industries, Inc. MIND 3.75 150,750 1.0
7,800 ArcBest Corp ARCB 16.25 126,750 0.8
15,100 Electro Scientific Industries, Inc. ESIO 5.84 88,184 0.6
1,200 Simpson Manufacturing Co., Inc. SSD 39.97 47,964 0.3
  Cash Balance     705,407 4.7
Grand Total     $15,049,034 100.0%  

Ariel Small Cap Deep 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
Past performance does not guarantee future results. © Ariel Investments, LLC. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC. Use of this website is subject to our Terms & Conditions of use. 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 investors outside the United States.

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