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 drive long-term results for our clients.
Our track record is one of the longest in the business
As a pioneer in small- and small/mid-cap value investing, we have a 38-year uninterrupted track record attributable to one portfolio manager.
Clearly defined parameters enhance our screening outcomes
We look for differentiated companies with robust, solid, enduring brands/franchises, strong cash flows, low debt, high-quality products or services, significant barriers to entry (moats) and low reinvestment requirements. We also consider environmental, social and governance (ESG) factors.
Concentrated 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 parameters, our focus is 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, ESG and moat ratings, as well as using a devil’s advocate to challenge our own investment theses.
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.
An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.
as of 6/30/2022
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(s)
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.
Ariel Small/Mid Cap Value Composite Performance
| Inception date: December 31, 2000 | Annualized | |||||||
| One Month |
Three Months |
Year To Date |
One Year |
Three Years |
Five Years |
Ten Years |
Since Inception |
|
|---|---|---|---|---|---|---|---|---|
| Gross of Fees | 9.43% | -3.02% | -16.01% | -12.64% | 10.13% | 8.66% | 13.15% | 9.37% |
| Net of Fees | 9.34% | -3.26% | -16.49% | -13.51% | 9.04% | 7.58% | 12.03% | 8.29% |
| Russell 2500™ Value Index | 9.68% | -0.45% | -8.59% | -3.38% | 9.27% | 7.34% | 10.60% | 9.03% |
| Russell 2500™ Index | 10.35% | 0.14% | -13.72% | -11.27% | 9.07% | 8.95% | 11.66% | 8.82% |
| S&P 500® Index | 9.22% | 0.39% | -12.58% | -4.64% | 13.36% | 12.83% | 13.80% | 7.49% |
Ariel Small/Mid Cap Value Composite Performance
| Inception date: December 31, 2000 | Annualized | |||||||
| One Month |
Three Months |
Year To Date |
One Year |
Three Years |
Five Years |
Ten Years |
Since Inception |
|
|---|---|---|---|---|---|---|---|---|
| Gross of Fees | -13.07% | -17.59% | -23.24% | -18.90% | 7.23% | 6.69% | 11.69% | 8.95% |
| Net of Fees | -13.14% | -17.80% | -23.62% | -19.70% | 6.17% | 5.64% | 10.58% | 7.88% |
| Russell 2500™ Value Index | -10.95% | -15.39% | -16.66% | -13.19% | 6.18% | 5.54% | 9.54% | 8.60% |
| Russell 2500™ Index | -9.55% | -16.98% | -21.81% | -21.00% | 5.91% | 7.04% | 10.49% | 8.36% |
| S&P 500® Index | -8.25% | -16.10% | -19.96% | -10.62% | 10.60% | 11.31% | 12.96% | 7.08% |
Ariel Investments, LLC (Ariel) is a Delaware limited liability company and federally registered investment adviser regulated by the U.S. Securities and Exchange Commission. Ariel is headquartered in Chicago, Illinois, with offices in New York, San Francisco, and Sydney. Ariel offers investment strategies that seek long-term capital appreciation by investing primarily in equity securities. Ariel utilizes a bottom-up, fundamental analysis to select quality company stocks. Taking a long-term view and applying independent thinking to our investment decisions, Ariel spans the market cap spectrum from small to large and covers the globe with international and global offerings. Ariel claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
The Ariel Small/Mid Cap Value Composite seeks long-term capital appreciation by investing in small/mid cap undervalued companies that show strong potential for growth. The Ariel Small/Mid Cap Value Composite differs from its benchmark, the Russell 2500™ Value Index, with fewer holdings concentrated in fewer sectors.
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. 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. Past performance does not guarantee future results. Investing in small and mid-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. The portfolio is often concentrated in fewer sectors than its benchmarks, and its performance may suffer if these sectors underperform the overall stock market. Investing in equity stocks is risky and subject to the volatility of the markets.
The Ariel Small/Mid Cap Value Composite has been examined for the periods from January 1, 2001 through December 31, 2021. A copy of the examination report is available upon request. Click here to obtain a GIPS Composite Report.
Index returns reflect the reinvestment of income and other earnings. Indexes are unmanaged, and investors cannot invest directly in an index. The Russell 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2500 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.
Schedule of Holdings
| Security Description | Ticker | % of Net Assets | |
|---|---|---|---|
|
Top Ten Equity Holdings
|
|||
| Madison Square Garden Entertainment Corp. | MSGE | 4.6 | |
| Lazard, Ltd. | LAZ | 4.4 | |
| Affiliated Managers Group, Inc. | AMG | 4.4 | |
| Boyd Gaming Corp. | BYD | 4.3 | |
| KKR & Co, Inc. | KKR | 4.2 | |
| Paramount Global | PARA | 4.2 | |
| Mattel, Inc. | MAT | 4.1 | |
| Gentex Corp. | GNTX | 3.9 | |
| Mohawk Industries, Inc. | MHK | 3.8 | |
| Axalta Coating Systems, Ltd. | AXTA | 3.7 | |
| Jones Lang LaSalle, Inc. | JLL | 3.5 | |
| Northern Trust Corp. | NTRS | 3.2 | |
| BOK Financial Corp. | BOKF | 3.1 | |
| J.M. Smucker Co. | SJM | 3.1 | |
| Laboratory Corp. of America Holdings | LH | 3.0 | |
| Envista Holdings Corp. | NVST | 2.9 | |
| First American Financial Corp. | FAF | 2.8 | |
| Zebra Technologies Corp. | ZBRA | 2.8 | |
| Madison Square Garden Sports Corp. | MSGS | 2.8 | |
| Interpublic Group of Cos., Inc. | IPG | 2.7 | |
| Masco Corp. | MAS | 2.7 | |
| Adtalem Global Education, Inc. | ATGE | 2.6 | |
| CBRE Group, Inc. | CBRE | 2.5 | |
| Kennametal, Inc. | KMT | 2.5 | |
| Resideo Technologies, Inc. | REZI | 2.4 | |
| Stericycle, Inc. | SRCL | 2.1 | |
| Royal Caribbean Cruises, Ltd. | RCL | 2.1 | |
| Snap-on, Inc. | SNA | 2.1 | |
| Janus Henderson Group plc | JHG | 2.0 | |
| Manchester United Plc | MANU | 1.9 | |
| Bio-Rad Laboratories, Inc. | BIO | 1.2 | |
| Charles River Laboratories International, Inc. | CRL | 1.0 | |
| Keysight Technologies, Inc. | KEYS | 1.0 | |
| Simpson Manufacturing Co., Inc. | SSD | 1.0 | |
| ADT, Inc. | ADT | 0.5 | |
| Cash Balance | 0.9 | ||
| Grand Total | 100.0% |
Our value process
Idea Generation
Looking through a long-term lens helps identify ideas others might not consider- Process:
Generate ideas from deep industry knowledge, extensive reading and computer screening - Risk management:
Search 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, ESG risk analysis and independent verification - Risk management:
Seek to invest in companies whose shares are trading at a 40% discount to PMV and/or 13x or less next year’s earnings - Benefit:
Enables us to 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 is assigned to challenge investment theses; proprietary ESG risk ratings are designated - Benefit:
Ideas vetted from multiple perspectives yield more informed final decisions by portfolio manager(s)
Portfolio Construction
Concentrated portfolios focus on our highest-conviction ideas- Process:
Build concentrated 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
Product Materials
Sector Weightings (%)
| Ariel Small/Mid Cap Value | Russell 2500 Value | Russell 2500 | S&P 500 | |
|---|---|---|---|---|
| Consumer Discretionary | 33.15 | 14.59 | 14.11 | 13.69 |
| Financials | 24.03 | 21.64 | 15.95 | 10.46 |
| Industrials | 22.39 | 16.86 | 19.06 | 12.18 |
| Health Care | 8.12 | 8.73 | 12.58 | 14.40 |
| Real Estate | 6.08 | 12.61 | 8.90 | 2.92 |
| Consumer Staples | 3.13 | 2.82 | 3.06 | 6.32 |
| Utilities | 2.14 | 4.86 | 3.63 | 3.37 |
| Telecommunications | 0.00 | 1.50 | 1.56 | 2.91 |
| Basic Materials | 0.00 | 4.41 | 4.00 | 1.88 |
| Energy | 0.00 | 4.31 | 5.00 | 4.48 |
| Technology | 0.00 | 7.68 | 12.15 | 27.38 |
Represents percentage of total equity holdings in the representative portfolio
Portfolio Characteristics
| Ariel Small/Mid Cap Value | Russell 2500 Value | Russell 2500 | S&P 500 | |
|---|---|---|---|---|
| Market Capitalization (In billions) | ||||
| Large Capitalization (143.32 & Above) | 0% | 0% | 0% | 53.78% |
| Medium/Large Capitalization (37.38 -- 143.32) | 0% | 0% | 0% | 28.78% |
| Medium Capitalization (11.98 -- 37.38) | 25.35% | 5.48% | 6.62% | 15.45% |
| Medium/Small Capitalization (4.04 -- 11.98) | 51.29% | 57.49% | 52.51% | 1.98% |
| Small Capitalization (4.04 & Below) | 23.36% | 37.03% | 40.87% | 0.01% |
| Dollar-Weighted Average (BIL)1 | 9.3 | 5.79 | 5.59 | 483.44 |
| Valuation Metrics2 | ||||
| Forward Price/Earnings | 11.11 | 10.41 | 11.44 | 15.95 |
| Trailing Price/Earnings | 10.24 | 10.51 | 12.24 | 18.49 |
| Discount to Private Market Value | -39.91 | n/a | n/a | n/a |
| Fundamentals | ||||
| 5 Yr. Estimated Earnings Growth3 | 7 | 8.47 | 12.41 | 11.44 |
| Debt Rating4 | BBB- | BB | BB | A |
| Interest Coverage Ratio5 | 8.54 | 2.98 | 3.07 | 9.42 |
| Return on Equity6 | 17.72 | 11.7 | 11.39 | 27.38 |
| Number of Holdings7 | 35 | 1,843 | 2,495 | 503 |
| Benchmark Sensitive Statistics | ||||
| Turnover8 | 29.23 | n/a | n/a | n/a |
| Active Share9 | 97.02 | n/a | n/a | n/a |
| Beta vs. S&P 500 (5-year)10 | 1.25 | 1.14 | 1.15 | 1.00 |
| Current Beta10 | 1.06 | 1.01 | 1.09 | 1.00 |
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: FactSet.
2 Price/Earnings data source: FactSet. 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: FactSet
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: FactSet
5 This characteristic measures companies' ability to pay interest expense with current profits. Source: FactSet
6 Source: FactSet
7 Turnover is for the trailing 1 year period and is generated internally. Source: Eagle
8 Active Share measures the degree of active management by a portfolio manager. Source: FactSet
9 5-year beta is generated internally. Source: Eagle
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 2500™ Value Index measures the performance of the small to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as "smid" cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2500 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.