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 Range: generally between $200 million and $2 billion
Inception: September 30, 1983
Number of holdings: 25-45
Turnover: 20-30%
Assets: $976.2 million
as of 6/30/2016
 
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

 
JWR-Independent-Thinking.png
John W. Rogers, Jr. on
Independent Thinking
Quarter End
Month End

Ariel Small Cap Value Tax-Exempt Composite Performance

As of July 31, 2016
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 5.23% 1.86% 3.76% -6.58% 4.49% 8.93% 7.17% 12.74%
Net of Fees 5.14% 1.60% 3.16% -7.51% 3.45% 7.85% 6.11% 11.62%
Russell 2000® Value Index 5.40% 7.65% 11.81% 5.59% 6.01% 10.03% 5.85% 10.69%
Russell 2000® Index 5.97% 8.29% 8.32% 0.00% 6.74% 10.43% 7.17% 9.07%
S&P 500® Index 3.69% 5.82% 7.66% 5.61% 11.16% 13.38% 7.75% 10.83%

Ariel Small Cap Value Tax-Exempt Composite Performance

As of June 30, 2016
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 -3.03% -2.31% -1.40% -13.21% 5.13% 6.44% 6.41% 12.60%
Net of Fees -3.11% -2.56% -1.89% -14.07% 4.09% 5.39% 5.36% 11.48%
Russell 2000® Value Index 0.30% 4.31% 6.08% -2.58% 6.36% 8.15% 5.15% 10.54%
Russell 2000® Index -0.06% 3.79% 2.22% -6.73% 7.09% 8.35% 6.20% 8.90%
S&P 500® Index 0.26% 2.46% 3.84% 3.99% 11.66% 12.10% 7.42% 10.73%


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, 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. The portfolio often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors and its performance may suffer if these sectors underperform the overall stock 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 Value (Representative Portfolio)

Schedule of Holdings

As of June 30, 2016
Shares Security Description CUSIP Ticker Market Price Market Value % of Net Assets
Top Ten Equity Holdings
29,200 Charles River Laboratories Intl, Inc. 159864107 CRL 82.44 2,407,248 5.1
51,400 First American Financial Corp. 31847R102 FAF 40.22 2,067,308 4.4
58,900 U.S. Silica Holdings, Inc. 90346E103 SLCA 34.47 2,030,283 4.3
16,500 Littelfuse, Inc. 537008104 LFUS 118.19 1,950,135 4.1
35,600 Zebra Technologies Corp. 989207105 ZBRA 50.10 1,783,560 3.8
56,325 Brady Corp. 104674106 BRC 30.56 1,721,292 3.7
75,800 Kennametal Inc. 489170100 KMT 22.11 1,675,938 3.6
47,900 International Speedway Corp. 460335201 ISCA 33.45 1,602,255 3.4
39,300 Simpson Manufacturing Co., Inc. 829073105 SSD 39.97 1,570,821 3.3
10,600 Bio-Rad Laboratories, Inc. 090572207 BIO 143.02 1,516,012 3.2
61,000 Team, Inc. 878155100 TISI 24.83 1,514,630 3.2
52,300 Brink's Co. 109696104 BCO 28.49 1,490,027 3.2
15,000 JLL 48020Q107 JLL 97.45 1,461,750 3.1
46,745 Lazard Ltd G54050102 LAZ 29.78 1,392,066 3.0
7,966 The Madison Square Garden Co 55825T103 MSG 172.51 1,374,215 2.9
26,300 Meredith Corp. 589433101 MDP 51.91 1,365,233 2.9
56,500 TEGNA, Inc. 87901J105 TGNA 23.17 1,309,105 2.8
113,300 Bristow Group Inc. 110394103 BRS 11.41 1,292,753 2.7
20,500 CEB Inc. 125134106 CEB 61.68 1,264,440 2.7
90,800 Janus Capital Group Inc. 47102X105 JNS 13.92 1,263,936 2.7
10,900 Fair Isaac Corp. 303250104 FICO 113.01 1,231,809 2.6
9,900 Dun & Bradstreet Corp. 26483E100 DNB 121.84 1,206,216 2.6
27,400 MTS Systems Corp. 553777103 MTSC 43.84 1,201,216 2.5
19,700 Anixter Intl Inc. 035290105 AXE 53.28 1,049,616 2.2
21,600 PrivateBancorp, Inc. 742962103 PVTB 44.03 951,048 2.0
11,200 IDEX Corp. 45167R104 IEX 82.10 919,520 2.0
13,300 Matthews Intl Corp. 577128101 MATW 55.64 740,012 1.6
72,000 Manning & Napier, Inc. 56382Q102 MN 9.50 684,000 1.5
18,300 Horace Mann Educators Corp. 440327104 HMN 33.79 618,357 1.3
40,200 Interface, Inc. 458665304 TILE 15.25 613,050 1.3
37,800 MSG Networks, Inc. 553573106 MSGN 15.34 579,852 1.2
65,300 Rosetta Stone Inc. 777780107 RST 7.75 506,075 1.1
25,000 Lumber Liquidators Holdings, Inc. 55003T107 LL 15.42 385,500 0.8
26,300 Gannett Co. Inc. 36473H104 GCI 13.81 363,203 0.8
12,900 Sotheby's 835898107 BID 27.40 353,460 0.8
24,800 Contango Oil & Gas Co. 21075N204 MCF 12.24 303,552 0.6
66,200 Mitcham Industries, Inc. 606501104 MIND 3.75 248,250 0.5
10,300 DeVry Education Group Inc. 251893103 DV 17.84 183,752 0.4
  Cash Balance       2,930,675 6.1
Grand Total     $47,122,170 100.0%  

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

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 Small Cap Value (Representative Portfolio)

Sector Weightings (%)

As of June 30, 2016
  Ariel Small Cap Value Russell 2000 Value Russell 2000 S&P 500
Producer Durables 33.52 12.53 13.17 10.54
Financial Services 24.61 41.32 26.45 17.79
Consumer Discretionary 19.83 10.89 14.30 13.67
Materials and Processing 9.54 5.32 7.13 3.06
Health Care 8.88 4.58 13.53 14.63
Technology 2.38 9.72 14.29 16.88
Energy 1.25 4.81 2.83 7.42
Utilities 0.00 8.46 5.44 6.54
Consumer Staples 0.00 2.36 2.86 9.46

Represents percentage of total equity holdings in the representative portfolio


Ariel Small Cap Value (Representative Portfolio)

Portfolio Characteristics

As of June 30, 2016
  Ariel Small Cap Value Russell 2000 Value Russell 2000 S&P 500
Market Capitalization (In billions)  
Large Capitalization (88.65 & Above) 0.0% 0.0% 0.0% 47.9%
Medium/Large Capitalization (24.85 -- 88.65) 0.0% 0.0% 0.0% 31.7%
Medium Capitalization (7.99 -- 24.85) 0.0% 0.0% 0.0% 18.0%
Medium/Small Capitalization (2.90 -- 7.99) 35.8% 12.7% 13.8% 2.3%
Small Capitalization (2.90 & Below) 64.2% 87.3% 86.2% 0.0%
Dollar-Weighted Average (BIL)1 1.95 1.26 1.39 75.57
Valuation Metrics2  
Forward Price/Earnings 14.9 15.2 17.0 17.3
Trailing Price/Earnings 36.8 25.3 32.6 20.7
Discount to Private Market Value -24.0 n/a n/a n/a
Fundamentals  
5 Yr. Estimated Earnings Growth3 8.5 8.9 12.0 10.9
Quality Rating4 B+ B+ A- A
Interest Coverage Ratio5 8.0 4.6 5.6 7.9
Return on Equity6 11.5 8.1 10.4 17.3
Number of Holdings 38 1361 2006 505
Benchmark Sensitive Statistics  
Turnover7 12.2 n/a n/a n/a
Active Share8 97.70 n/a n/a n/a
Beta vs. S&P 500 (5-year)9 1.42 1.16 1.22 1.00
Current Beta10 1.09 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. 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.

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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