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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: $411.9 million
as of 6/30/2018
 
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
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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

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Quarter End
Month End

Ariel Small Cap Deep Value Composite Performance

As of June 30, 2018
Inception date: October 31, 2013  
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Since
Inception
Gross of Fees -0.21% 10.68% 5.07% 9.54% 3.76% 1.00%
Net of Fees -0.29% 10.41% 4.54% 8.45% 2.74% 0.00%
Russell 2000® Value Index 0.61% 8.30% 5.44% 13.10% 11.22% 9.53%
Russell 2000® Index 0.72% 7.75% 7.66% 17.57% 10.96% 10.48%
S&P 500® Index 0.62% 3.43% 2.65% 14.37% 11.93% 12.11%

Ariel Small Cap Deep Value Composite Performance

As of June 30, 2018
Inception date: October 31, 2013  
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Since
Inception
Gross of Fees -0.21% 10.68% 5.07% 9.54% 3.76% 1.00%
Net of Fees -0.29% 10.41% 4.54% 8.45% 2.74% 0.00%
Russell 2000® Value Index 0.61% 8.30% 5.44% 13.10% 11.22% 9.53%
Russell 2000® Index 0.72% 7.75% 7.66% 17.57% 10.96% 10.48%
S&P 500® Index 0.62% 3.43% 2.65% 14.37% 11.93% 12.11%


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, 2017. 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 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. 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 Small Cap Deep Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2018
  Ariel Small Cap Deep Value Russell 2000 Value Russell 2000 S&P 500
Technology 28.84 9.63 12.47 22.24
Financial Services 23.47 40.43 25.41 19.63
Consumer Discretionary 17.01 11.91 14.90 14.25
Producer Durables 10.40 11.22 13.34 10.03
Materials and Processing 7.10 5.78 7.00 2.77
Health Care 5.73 4.52 15.32 13.66
Utilities 4.68 6.67 4.18 4.94
Energy 2.77 7.38 4.87 6.34
Consumer Staples 0.00 2.45 2.49 6.14

Represents percentage of total equity holdings in the representative portfolio



Ariel Small Cap Deep Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2018
  Ariel Small Cap Deep Value Russell 2000 Value Russell 2000 S&P 500
Market Capitalization (In billions)  
$1.00 & Above 11.2% 77.2% 80.9% 100.0%
$0.50 - $1.00 12.3% 14.6% 12.4% 0.0%
$0.25 - $0.50 37.2% 6.0% 5.1% 0.0%
$0.25 & Below 39.4% 2.2% 1.6% 0.0%
Dollar-Weighted Average (BIL)1 0.29 1.68 1.84 102.91
Key Characteristics  
Price/Book2 1.4 1.6 2.4 3.3
Discount to Private Market Value3 -35.9 n/a n/a n/a
Debt/Capital4 14.1 44.9 43.2 54.8
Cash as % of Market Cap2 20.7 n/a n/a n/a
Number of Holdings2 41 1363 2019 505
Turnover5 43.2 n/a n/a n/a
Active Share6 99.19 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 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. 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.


(Representative Portfolio)

Schedule of Holdings

As of June 30, 2018
Shares Security Description Ticker Market Price Market Value % of Net Assets
Top Ten Equity Holdings
213,000 Century Casinos, Inc. CNTY 8.75 1,863,750 6.0
124,675 Cowen Inc. COWN 13.85 1,726,749 5.6
407,203 RealNetworks, Inc. RNWK 3.7 1,506,651 4.9
141,501 ORBCOMM, Inc. ORBC 10.1 1,429,160 4.6
127,500 Kindred Biosciences, Inc. KIN 10.65 1,357,875 4.4
224,008 Telenav Inc. TNAV 5.6 1,254,445 4.1
94,400 Safeguard Scientifics Inc. SFE 12.8 1,208,320 3.9
46,700 U.S. Silica Holdings, Inc. SLCA 25.69 1,199,723 3.9
112,700 Green Brick Partners Inc. GRBK 9.8 1,104,460 3.6
60,800 Capital Southwest Corp. CSWC 18.11 1,101,088 3.6
21,100 First American Financial Corp. FAF 51.72 1,091,292 3.5
188,100 Ballantyne Strong, Inc. BTN 4.85 912,285 3.0
154,700 Edgewater Technology Inc. EDGW 5.42 838,474 2.7
34,478 Tejon Ranch Co. TRC 24.3 837,815 2.7
131,900 PCTEL, Inc. PCTI 6.24 823,056 2.7
25,600 Strattec Security Corp. STRT 30.55 782,080 2.5
33,656 Team, Inc. TISI 23.1 777,454 2.5
54,900 Bristow Group, Inc. BRS 14.11 774,639 2.5
99,100 GSI Technology Inc. GSIT 7.52 745,232 2.4
200,800 SeaChange Intl, Inc. SEAC 3.42 686,736 2.2
17,000 Methode Electronics Inc. MEI 40.3 685,100 2.2
41,725 Rosetta Stone Inc. RST 16.03 668,852 2.2
131,800 Emcore Corporation EMKR 5.05 665,590 2.2
276,500 Synacor, Inc. SYNC 2 553,000 1.8
27,700 AstroNova, Inc. ALOT 18.85 522,145 1.7
216,900 180 Degree Capital Corp TURN 2.31 501,039 1.6
33,600 Lakeland Industries, Inc. LAKE 14.15 475,440 1.5
114,500 Mitcham Industries, Inc. MIND 4.02 460,290 1.5
9,400 MB Financial, Inc. MBFI 46.7 438,980 1.4
85,000 Aspen Aerogels Inc. ASPN 4.9 416,500 1.3
62,200 Glu Mobile Inc. GLUU 6.41 398,702 1.3
63,800 Cumberland Pharmaceuticals, Inc. CPIX 6.13 391,094 1.3
42,900 Gulf Island Fabrication, Inc. GIFI 9 386,100 1.2
34,200 Perceptron, Inc. PRCP 10.55 360,810 1.2
33,500 CPI Aerostructures, Inc. CVU 10.5 351,750 1.1
6,200 Movado Group Inc. MOV 48.3 299,460 1.0
19,200 Landec Corp. LNDC 14.9 286,080 0.9
241,000 Orion Energy Systems, Inc. OESX 1.1 265,100 0.9
29,700 Atlas Financial Holdings, Inc. AFH 8.75 259,875 0.8
18,500 AutoWeb Inc. AUTO 4.52 83,620 0.3
53,353 GlassBridge Enterprises Inc. GLAE 0.81 43,216 0.1
  Cash Balance     381,802 1.2
Grand Total     $30,915,829 100.0%  

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
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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