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John Rogers' Ariel Investment Fund April Commentary
Posted by: Holly LaFon (IP Logged)
Date: May 23, 2014 02:05PM
At Ariel Investments, three qualities connect our various strategies: patience, focus and independent thinking. Our portfolios now stretch from micro-cap to large cap and range from deep value to traditional value to global, but the philosophy behind them inspires similar activity during market dislocations. That is, when stocks fall, whether across markets or within one of our portfolios, our portfolio managers and analysts get extra busy. As vigilant assessors of value, we gather information and crunch numbers to determine whether the price shifts reflect fundamental, long-term changes in what businesses are worth. If we determine gaps between price and value have widened, hence creating better investment opportunities, we will buy more shares of the companies that have been, in our view, unfairly punished.
In the first four months of 2014 some areas of the market have gained in quite normal amounts. Large caps are up +2.56% at home and +2.31% in developed markets abroad, as measured by the S&P 500 and MSCI EAFE indexes, respectively. Smaller-cap U.S. stocks, however, have had a mixed year, with some small- and mid-cap indexes up and some down; the bellwether small-cap Russell 2000 Index has fallen –2.80%. Moreover, our portfolios in the micro-cap to mid-cap range have had negative returns in the first four months of the year. We think that has created opportunities for our managers, so this month, we wanted to describe the most significant stock purchases in our smaller-cap deep value and traditional value portfolios firm-wide.
Within our deep value strategy we have three portfolios: Micro-Cap Value, Small Cap Deep Value and Ariel Discovery Fund, with the latter two being very similar. As you know, lead manager David Maley, along with portfolio manager Ken Kuhrt, focuses intently on statistically cheap stocks, especially those with stock prices that are very low compared to the company's assets. Generally speaking, in downturns, the deep value strategy is likely to load up on stocks that simply got cheaper on that basis. Among the stocks held at the end of 2013, below are the most-purchased stocks on a percentage basis in these portfolios:
For three of these companies, we think there was no material news and the stocks just became even cheaper: Aware, Inc. (AWRE), Capital Southwest Corp. (CSWC) and Gulf Island Fabrication, Inc. (GIFI) In the case of Oplink Communications, Inc. (OPLK), the company's short-term earnings were low, but we believe the business's value did not change long term. Finally, there was significant change at XO Group Inc. (XOXO), formerly known as The Knot, although we think it is actually positive long term. XO Group provides multimedia services to the wedding, newlywed, and pregnancy markets and has been best known as a series of websites. Co-founder David Liu is relinquishing the CEO title he has held since 1996. Mike Steib, hired as president in 2013, is assuming that title in order to focus on the mobile market—his personal specialty and a perceived weakness for the company. We do not think the move was absolutely necessary but do think it is more likely to improve the business rather than harm it.
Meanwhile, in our traditional value portfolios in the small-cap, small/mid-cap, and mid-cap universes, we seek great companies with large economic moats1 and strong management teams that happen to trade at a discount to intrinsic value. In Ariel Small Cap Value Product, Ariel Small/Mid Cap Value Product, Ariel Mid Cap Value Product, Ariel Fund, and Ariel Appreciation Fund we examine takeover values, a full-and-fair trading multiple and discounted cash flow models in order to determine a company's private market value. Below are the stocks held all year with the largest increase in firm-wide share counts:
J.M. Smucker Co. (SJM) and Stanley Black & Decker, Inc. (SWK) have been in our portfolios since 2000 and 2001, respectively. We see them as very stable businesses with durable competitive advantages and stellar brand-name recognition. So when they traded down on little news early in the year, we bought more shares. International Game Technology (IGT) is by far our most contrarian purchase covered in this overview. It lost –30.38% in the first four months of this year amid ongoing angst over its Double Down acquisition, a lackluster gaming market and falling market share. Simply put, we think casinos will eventually see more traffic and International Game Technology will fix its internal problems. On the other hand, Bristow Group Inc. (BRS)'s stock has been cheap and has gone up only +2.66% in 2014. During the first quarter, its CEO, Bill Chiles, announced he would retire, to be replaced by seasoned CFO Jonathan Baliff; we consider that move positive overall. Finally, Omnicom Group Inc. (OMC) fell due to fears surrounding its likely merger with Publicis Groupe SA. There are international tax issues and regulatory issues around the globe. We still think the merger is very likely to happen, but before the stock began trading down due to these concerns its stock was still a bargain in our eyes were the merger to fail. Now it is cheaper if that happens.
We hope these rationales serve as strong evidence that when our stocks trade down, we are careful in selecting what to purchase. For the most part, we could have bought stocks in our portfolios that fell further. Instead, we focused on the gap between price and value and made purchases on that basis.
The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. Past performance is no guarantee of future results.
As of 3/31/14, the Ariel Micro-Cap Value (representative portfolio) held the following positions referenced: Oplink Communications, Inc. 2.4%, Aware, Inc. 1.2%, Capital Southwest Corp. 0.0%, XO Group Inc. 2.1% and Gulf Island Fabrication, Inc. 0.0%. As of 3/31/14, the Ariel Small Cap Deep Value (representative portfolio) held the following positions referenced: Oplink Communications, Inc. 2.4%, Aware, Inc. 0.0%, Capital Southwest Corp. 1.5%, XO Gr oup Inc. 2.1% and Gulf Island Fabrication, Inc. 2.3%. As of 3/31/14, Ariel Discovery Fund held the following positions refe renced: Oplink Communications, Inc. 2.2%, Aware, Inc. 0.0%, Capital Southwest Corp. 0.0%, XO Group Inc. 2.1% and Gulf Island Fabrication, Inc. 2.2%. Portfolio holdings are subject to chan ge. The performance of any single portfolio hol ding is no indication of the performance of other portfolio holdings of the Ariel Mi cro- Cap Value or Ariel Small Cap Deep Value portfolios or of Ariel Discovery Fund.
As of 3/31/14, the Ariel Small Cap Value (representative portfolio ) held the following positions referenced: J.M. Smucker Co. 0 .0%, Stanley Black & Decker, Inc. 0.0%, International Game Technolog y 0.0%, Bristow Group Inc. 4.7% and Omnicom Group Inc. 0.0%. As of 3/31/14, the Ariel Small/Mid Cap Valu e (representative portfolio) he ld the following positions referenced: J.M. Smucker C o. 1.9%, Stanley Black & Decker, Inc. 0.0%, In ternational Game Technology 3.0%, Bristow Group Inc. 2.8% and Omnicom Group Inc. 0.0%. As of 3/31/14, the Ariel Mid Cap Valu e (representative portfolio) held the followi ng positions referenced: J.M. Smucker C o. 2.9%, Stanley Black & Decker, Inc. 3.5%, In ternational Game Technology 3.1%, Bristow Group Inc. 3.4% and Omnicom Group Inc. 2.8%. As of 3/31/14, Ariel Fund held the following positions re ferenced: J.M. Smucker Co. 2.6%, Stanley Black & Decker, Inc. 0. 0%, International Game Technology 2.9%, Bristow Group Inc. 3.1% an d Omnicom Group Inc. 0.0%. As of 3/31/14, Ariel Appreciation Fund held the following positions referenced: J.M. Smucker Co . 2.9%, Stanley Black & Decker, Inc. 3.5%, International Game Technology 3.2%, Bristow Group Inc. 3.5% and Omnicom Group Inc. 2.9%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of ot her portfolio holdings of the Ariel Small Cap Value, the Ariel Small/Mid Cap Value or Ariel Mid Cap Value portfolios, or of Ariel Fund or Ariel Appreciation Fund.
Investors should consider carefully the investment objectives, risks, charges, an d expenses before investing. For a current pro spectus or summary prospectus, which cont ains this and other information about the funds o ffered by Ariel Investment Trust, call us at 800- 292-7435 or visit our website, arielinvestments.com. Please read the prospectus or summary prospe ctus carefully before investin g. Distributed by Ariel Distributors , LLC, a wholly-owned subsidiary of Ariel Investments, LLC.
The S&P 500® Index is the most widely accepted barometer of the market. It includes 500 blue chip, large cap stocks, which together represent about 75% of the total U.S. equities ma rket. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their mark et cap and current index membership. MSCI EAFE ® Index is an unmanaged, market weighted index of companies in developed markets, excluding the U.S. and Canada. MS CI makes no express or implied warranties or representations and shall have no liability whatsoever with re spect to any MSCI data containe d herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI.
Guru Discussed: John Rogers: Current Portfolio, Stock Picks
Stocks Discussed: SJM, SWK, IGT, BRS, OMC, AWRE, CSWC, GIFI, OPLK, XOXO,