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Value Strategy
Ariel Small Cap Value

Why Ariel’s value approach


Ariel’s flagship value approach is built on the basic principle of targeting undervalued companies that show a strong potential for growth. We take advantage of the market’s short-term thinking to optimize long-term results for our clients.

Our track record is one of the longest in the business

As a pioneer in small- and mid-cap value investing, our 30-year history has been distinguished by excellent long-term results—attributable to one portfolio manager for the duration.

Clearly defined parameters enhance our screening outcomes

We look for differentiated companies with strong brands/franchises, strong cash flows, low debt, high-quality products or services, significant barriers to entry (moats) and low reinvestment requirements.

Concentrated yet diversified portfolios focus on our highest-conviction ideas

We choose to go deep instead of broad, often taking a contrarian point of view.

In-depth sector and industry expertise informs each investment decision

Our portfolio managers and research analysts evaluate companies within a well-established "circle of competence" — industries where we are truly experts.

Risk management is a top priority

We define risk as a permanent loss of capital, controlled at the portfolio and stock level via allocation limits, our focus on private market value (PMV) and our in-depth understanding of the companies we choose.

We also mitigate risk by investing with a margin of safety (40% discount to PMV), employing proprietary debt and moat ratings and using a devil’s advocate to challenge our own views.



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: Russell 2000
Inception: September 30, 1983
Number of holdings: 25-45
Turnover: typically 20-30%
Assets: $871.4 million
as of 9/30/2019
 
Portfolio Managers
John W. Rogers, Jr.
Co-Portfolio Manager
Kenneth E. Kuhrt Kenneth E. Kuhrt, CPA
Co-Portfolio Manager
 

Our value investment philosophy


Patience

We take the long-term view.
  • Look past short-term noise: three- to five-year horizon enables us to be opportunistic when price dislocations arise
  • Take our time to research a potential holding and patiently wait for the margin of safety we require
  • Build expertise and accumulate deep knowledge; develop and cultivate independent sources to inform our stock picking

Independence

We invest to our convictions, not to benchmarks.
  • Build truly active portfolios concentrated in a limited number of names and industries
  • Buy out-of-favor, misunderstood and ignored stocks
  • Buy when others are selling, and sell when others are buying

Expertise

We specialize in bottom-up, fundamental analysis.
  • Draw on extensive reading, industry expertise, and computer screening to identify overlooked opportunities
  • Surround company to identify prospects - and problems - others don't recognize
  • Ask questions to gain insight, not just information

Teamwork

We work collaboratively with a shared commitment to excellence.
  • Leverage contacts and knowledge across portfolios
  • Senior research team input informs final decisions made by lead or co-portfolio manager

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Quarter End
Month End

Ariel Small Cap Value Tax-Exempt Composite Performance

As of October 31, 2019
Inception date: September 30, 1983 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees 2.47% -0.31% 19.47% 8.05% 10.83% 5.78% 12.07% 12.54%
Net of Fees 2.38% -0.56% 18.49% 6.98% 9.74% 4.73% 10.96% 11.43%
Russell 2000® Value Index 2.42% 1.67% 15.55% 3.22% 8.60% 6.24% 11.08% 10.43%
Russell 2000® Index 2.63% -0.40% 17.18% 4.90% 10.96% 7.37% 12.27% 9.10%
S&P 500® Index 2.17% 2.43% 23.16% 14.33% 14.91% 10.78% 13.70% 11.03%

Ariel Small Cap Value Tax-Exempt Composite Performance

As of September 30, 2019
Inception date: September 30, 1983 Annualized
  One
Month
Three
Months
Year
To Date
One
Year
Three
Years
Five
Years
Ten
Years
Since
Inception
Gross of Fees 4.10% -0.14% 16.59% -6.42% 8.31% 6.23% 11.17% 12.49%
Net of Fees 4.01% -0.39% 15.73% -7.35% 7.24% 5.18% 10.07% 11.38%
Russell 2000® Value Index 5.13% -0.57% 12.82% -8.24% 6.54% 7.17% 10.06% 10.39%
Russell 2000® Index 2.08% -2.40% 14.18% -8.89% 8.23% 8.19% 11.19% 9.04%
S&P 500® Index 1.87% 1.70% 20.55% 4.25% 13.39% 10.84% 13.24% 10.99%


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 Ariel Small Cap Value Tax-Exempt Composite seeks long-term capital appreciation by investing in small cap undervalued companies that show strong potential for growth. The Ariel Small Cap Value Tax-Exempt 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 Value Tax-Exempt Composite has been examined for the periods from October 1, 1983 through December 31, 2018. 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. The portfolio is often concentrated in fewer sectors than its benchmarks, and its performance may suffer if these sectors underperform the overall stock 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 Value (Representative Portfolio)

Schedule of Holdings

As of September 30, 2019
Shares Security Description Ticker Market Price Market Value % of Net Assets
Top Ten Equity Holdings
17,700 First American Financial Corp. FAF 59.01 1,044,477 5.6
13,700 Simpson Manufacturing Co., Inc. SSD 69.37 950,369 5.1
10,700 Brink's Co. BCO 82.95 887,565 4.7
6,000 Charles River Laboratories Intl, Inc. CRL 132.37 794,220 4.2
10,100 Generac Holdings Inc. GNRC 78.34 791,234 4.2
4,440 Littelfuse, Inc. LFUS 177.31 787,256 4.2
21,100 Lazard Ltd. LAZ 35 738,500 3.9
23,400 Kennametal, Inc. KMT 30.74 719,316 3.8
2,025 Bio-Rad Laboratories, Inc. BIO 332.74 673,799 3.6
2,433 The Madison Square Garden Co. MSG 263.52 641,144 3.4
10,800 MTS Systems Corp. MTSC 55.25 596,700 3.2
52,300 Mattel, Inc. MAT 11.39 595,697 3.2
11,200 Brady Corp. BRC 53.05 594,160 3.2
11,600 Stericycle Inc. SRCL 50.93 590,788 3.2
59,800 U.S. Silica Holdings, Inc. SLCA 9.56 571,688 3.1
16,200 Methode Electronics Inc. MEI 33.64 544,968 2.9
24,600 Interpublic Group of Cos., Inc. IPG 21.56 530,376 2.8
3,700 JLL JLL 139.06 514,522 2.7
25,500 Team, Inc. TISI 18.05 460,275 2.5
21,200 Knowles Corporation KN 20.34 431,208 2.3
5,400 BOK Financial Corp. BOKF 79.15 427,410 2.3
25,600 MSG Networks, Inc. MSGN 16.22 415,232 2.2
10,300 Korn/Ferry International KFY 38.64 397,992 2.1
2,300 Snap-On, Inc. SNA 156.54 360,042 1.9
22,700 TEGNA, Inc. TGNA 15.53 352,531 1.9
23,900 Interface, Inc. TILE 14.44 345,116 1.8
4,400 Anixter Intl, Inc. AXE 69.12 304,128 1.6
12,118 Janus Henderson Group plc JHG 22.46 272,170 1.5
895 Fair Isaac Corp. FICO 303.52 271,650 1.4
5,100 Horace Mann Educators Corp. HMN 46.33 236,283 1.3
5,200 Meredith Corp. MDP 36.66 190,632 1.0
10,800 Rosetta Stone Inc. RST 17.4 187,920 1.0
4,900 Matthews Intl Corp. MATW 35.39 173,411 0.9
3,600 Adtalem Global Education, Inc. ATGE 38.09 137,124 0.7
23,000 Mitcham Industries, Inc. MIND 3.25 74,750 0.4
  Cash Balance     1,136,026 6.2
Grand Total     $18,740,679 100.0%  

Our value process


Idea Generation

Looking through a long-term lens helps identify ideas others might not consider
  • Process:
    Generate ideas from industry knowledge, extensive reading and computer screening
  • Risk management:
    Look for out-of-favor, misunderstood and ignored stocks whose low prices reduce the risk of owning them
  • Benefit:
    In-depth industry knowledge helps uncover investment ideas others may have overlooked

Bottom-up Research

Bottom-up research determines underlying value and identifies key issues
  • Process:
    Extensive valuation work and independent verification
  • Risk management:
    Seek to invest in companies whose equities are trading at a 40% discount to PMV and/or 13x or less next year's earnings
  • Benefit:
    Helps us find quality companies in industries where our expertise adds value

Team Validation

Team review and debate test the validity of our convictions
  • Process:
    Rigorous debate and discussion
  • Risk management:
    A devil's advocate may be assigned to challenge an investment thesis
  • Benefit:
    Ideas vetted from multiple perspectives yield more informed final decisions by portfolio manager(s)

Portfolio Construction

Concentrated yet diversified portfolios drive better outcomes
  • Process:
    Build concentrated yet diversified portfolios weighted by conviction
  • Risk management:
    Strict buy and sell criteria
  • Benefit:
    Unique portfolio with benchmark-agnostic industry weightings drives high active share and thereby helps generate alpha

Ariel Small Cap Value

Product Materials

 
Portfolio Manager Letters:
Ariel Small Cap Value (Representative Portfolio)

Sector Weightings (%)

As of September 30, 2019
  Ariel Small Cap Value Russell 2000 Value Russell 2000 S&P 500
Producer Durables 35.13 12.25 14.51 9.85
Consumer Discretionary 20.27 12.39 13.10 14.51
Financial Services 19.91 42.07 26.73 19.93
Materials and Processing 8.65 6.17 6.51 2.85
Health Care 8.34 4.77 15.89 13.15
Technology 7.27 7.73 12.15 22.69
Energy 0.42 5.82 3.51 4.52
Utilities 0.00 7.05 5.04 5.87
Consumer Staples 0.00 1.75 2.56 6.63

Represents percentage of total equity holdings in the representative portfolio


Ariel Small Cap Value (Representative Portfolio)

Portfolio Characteristics

As of September 30, 2019
  Ariel Small Cap Value Russell 2000 Value Russell 2000 S&P 500
Market Capitalization (In billions)  
Large Capitalization (114.66 & Above) 0.0% 0.0% 0.0% 50.4%
Medium/Large Capitalization (31.38 -- 114.66) 0.0% 0.0% 0.0% 30.9%
Medium Capitalization (10.17 -- 31.38) 0.0% 0.0% 0.0% 16.4%
Medium/Small Capitalization (3.57 -- 10.17) 56.4% 13.6% 18.2% 2.3%
Small Capitalization (3.57 & Below) 43.6% 86.4% 81.8% 0.0%
Dollar-Weighted Average (BIL)1 3.16 1.54 1.76 114.68
Valuation Metrics2  
Forward Price/Earnings 13.5 13.3 15.6 17.6
Trailing Price/Earnings 20.6 21.7 33.0 21.1
Discount to Private Market Value -24.9 n/a n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth3 9.7 8.7 11.0 9.8
Quality Rating4 B+ B+ A- A
Interest Coverage Ratio5 7.1 3.8 4.8 7.7
Return on Equity6 11.7 8.2 9.9 18.7
Portfolio Construction  
Number of Holdings6 35 1402 2003 505
Turnover 23.0 n/a n/a n/a
Benchmark Sensitive Statistics  
Active Share7 97.96 n/a n/a n/a
Beta vs. S&P 500 (5-year)8 1.32 1.08 1.15 1.00
Current Beta9 1.05 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 Price/Earnings data source: BNY Mellon. 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.
3 This indicates the consensus outlook for a portfolio's EPS growth. I/B/E/S provides medians of research analysts' estimates for companies' long-term growth rates. Only stocks with at least three estimates in the I/B/E/S database are included; medians are less useful with fewer estimates, and research coverage may be less current. Source: BNY Mellon
4 This characteristic uses Compustat's earnings and dividend rankings for common stocks, which measure each stock's quality. The following letter rankings are possible: A+ Highest quality; A and A- High quality and above-average quality; B+, B, and B- Average quality, below-average quality, and lower quality; C and D Lowest quality and in reorganization; Not ranked. Source: BNY Mellon
5 This characteristic measures companies' ability to pay interest expense with current profits. Source: BNY Mellon
6 Source: BNY Mellon
7 Turnover is for the trailing 1 year period and is generated internally. Source: Fiserv APL
8 Active Share measures the degree of active management by a portfolio manager. Source: FactSet
9 5-year beta is generated internally. Source: Zephyr Style Advisor
10 Current beta (1-year trailing) is generated internally through FactSet and is based on daily security returns.

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.

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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