Globally stocks performed quite well in the last three months of 2012, but the uncertainties created by the fiscal cliff in the United States hampered returns here. For the most part, 2012 followed the same general pattern traversed the last two years: a strong start, followed by a swoon, ending with a good finish. The MSCI EAFE Index, for instance, was up +11.43% in the first two months of the year, down -7.23% from March 1st through June 30th, then jumped +14.05% in the last half of the year. In the U.S., stocks from large-caps to micro-caps followed a similar trajectory but faded in the fourth quarter. It seems many Americans sold due to the potential changes in tax rates more than because they feared the economic damage some prognosticators forecasted. In the end, taxes did not change as much as some expected, so it is possible individuals may buy stocks back. In our domestic portfolios, we used the lethargic three-month period to trim relatively more expensive holdings and add to cheaper ones— and find more bargains. In the fourth quarter of 2012, Ariel Fund returned +4.09%, landing between the Russell 2500 Value Index and the Russell 2000 Value Index, which rose +4.14% and +3.22%, respectively.
During the past three months, some of our holdings strongly outperformed. Cruiseline Royal Caribbean Cruises Ltd. (RCL), sailed to a +12.94% rise after beating analysts' pessimistic projections. Admittedly, its earnings per share fell to $1.68 in the third-quarter of 2012 from $1.82 a year previous. Analysts, however, thought earnings would fall even further—to $1.46 per share. The company also forecasted calm seas ahead—saying it was "encouraged by the trends so far" in bookings for 2013. Royal's stock fell in the first five months of 2012 due to pessimism surrounding overall economic growth and consumer spending—plus the cloud created by the Costa Concordia tragedy. That said, the stock staged a strong recovery in the second half of the year as its fundamentals defied Wall Street naysayers. We continue to see Royal Caribbean as a very well-run enterprise with a great brand, which offers consumers cost-effective, high-quality vacations. Also, consumer product and office supply manufacturer Newell Rubbermaid Inc. (NWL) advanced +17.47% after reaffirming fiscal 2012 guidance and continuing to implement its restructuring. Specifically, the company issued guidance for core sales growth of 2% to 3%, an estimate that the crowd has viewed skeptically. In large measure, the market has ignored a significant shift: the company has exited its more commoditized products in favor of those that are differentiated and well-branded—which should hold up much better in a slow-growth environment. Moreover, Newell's robust cost-cutting push, cleverly named Project Renewal ("re-Newell," that is), is ongoing. Although the company intends to reduce its workforce by roughly 10% over the next 30 or so months, the plan has five components including optimizing manufacturing and streamlining decision-making. We think the company continues to improve, and, as such, the stock remains inexpensive.
Some of our holdings struggled in the last three months of the year. Asset manager Janus Capital Group Inc. (JNS) dropped -8.48%, largely in sympathy with the market's swoon but also due to a high-profile downgrade in its stock rating. For most of 2012 the stock was on a tear. It received a significant boost when Japanese insurer Dai-Ichi agreed to buy up to 20% of the company but naturally slumped after that level was reached. Moreover, Goldman Sachs put a "sell" rating on the shares, putting further pressure on them. We accept that buy and sell ratings, mutually advantageous joint ventures, and the rise and fall of the overall market may affect the short-term direction of Janus equity. That said, our overall thesis holds that Janus occupies key niches in the asset manager universe, has an abundance of talent, and will, therefore, continue to grow profitably going forward. In addition, natural gas producer Contango Oil & Gas Co. (MCF) returned -9.28% due to a necessary management transition as well as small disappointments in exploration. Ken Peak, who was forced to take a leave of absence after encountering health issues, recently relinquished the CEO title. The new CEO, Joseph Ramano, assisted Peak in founding Contango—and thus has known the company well since its 1999 inception. Compounding this issue, in October the company announced that its Eagle and Fang projects were dry holes; they found no commercially viable hydrocarbons available. While two dry holes in one month might sound troubling, it is simply the nature of the exploration business. Especially given the recent slide, we think the stock is very cheap, and moreover our confidence in the enterprise has not fallen at all.
In the fourth quarter, we added three new positions to Ariel Fund. We initiated a position in energy services company Bristow Group Inc. (BRS), which provides more than 550 helicopters to service offshore oil and gas rigs. As the industry moves further and further offshore to extract fuel, we believe Bristow stands to benefit significantly. In addition, we purchased Anixter Intl Inc. (AXE), a long-term holding in our small and small/mid separate account products. Anixter is a leading distributor of communications products, wire and cable. Its size and scale allow the company to earn superior returns relative to its smaller competitors. Anixter is working diligently to expand its product set to include higher margin businesses, such as high technology network equipment and security products. Lastly, we added casino game operator WMS Industries Inc. (WMS) to Ariel Fund. Currently a holding in Ariel Discovery Fund, the company has a competitive advantage due to three primary factors: a well-recognized and innovative product portfolio, solid relationships with major customers, and its status as a major participant in a highly-regulated industry with major barriers to entry. With solid profitability, growth potential from new products and an improving economy as well as a current price at book value, we view WMS as presenting an attractive opportunity. We did not eliminate any positions during the quarter.
Putting forward our initial investment outlook for the year is beginning to feel a bit like Bill Murray's Groundhog Day. That is, for the third year in a row, the market is climbing a wall of worry. Included under that heading comes the European debt crisis, the socalled New Normal, unemployment, the sequester and debt ceiling, and so on. We take a completely different view, largely because we have a very different process. Although we certainly read as many periodicals as any investment organization— and likely many more—we do not use them to craft a portfolio from the top-down. Rather, we examine the business results of our stocks and potential holdings, discuss in detail what our management teams are seeing, and draw a very general picture from there. What we see and hear are businesses chugging along, a lot of thoughtful capital allocation strategies (strengthening balance sheets, returning cash to shareowners) and reasonable demand from end customers. Broadly speaking valuations are cheaper than usual, and the market has enough inefficiencies here and there to craft quite attractive portfolios.
This commentary candidly discusses a number of individual companies. These opinions are current as of the date of this commentary but are subject to change. The information provided in this commentary does 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.
As of 12/31/12, Royal Caribbean Cruises Ltd. comprised 3.2% of Ariel Fund; Newell Rubbermaid Inc. 2.9%; Janus Capital Group Inc. 3.8%; Contango Oil & Gas Co. 2.8%; Bristow Group Inc. 1.2%; Anixter Intl Inc. 0.4% and WMS Industries Inc. 2.7%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.
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 2000® Value Index measures the performance of the smallcap 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. MSCI EAFE® Index is an unmanaged, market-weighted index of companies in developed markets, excluding the U.S. and Canada. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained 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.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current prospectus or summary prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800- 292-7435 or visit our web site, arielinvestments.com. Please read the prospectus or summary prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC.