Whenever people ask our macroeconomic outlook or projections, we tell them our views ultimately come down to what we hold in our portfolios. That is, we are pure bottom-up stock pickers who select each stock on its own merit, endeavoring to buy strong businesses at discounts to their intrinsic value. So we do not have any sort of top-down GDP growth projection based on abstruse calculations. Rather, we develop a broad perspective from what management teams tell us. Ultimately, then, our view of the future maps organically to our top holdings. One way to use this information is to detect the shifts in our views from one year to the next based on the changes to our top holdings firmwide. This month, we will walk you through that exercise.
Below is a list of our top 10 firmwide holdings (by assets) as of December 31, 2012, complete with the 2012 year-end firmwide rank, the 2011 year-end firmwide rank and the share count percentage change. We have also included the stocks that were in the top 10 at the end of 2011 but were not in that group this year.
Given our long-term focus and patient investing approach, you would expect to see heavy overlap between the 2011 top 10 and the top holdings in 2012—and you do. On the other hand, you would expect to see some changes unless somehow nothing happened for 365 days. We believe there are telling shifts in our top holdings over 2012. Before we comment further, it bears noting that all of the holdings in our top 10 will (almost by definition) come from the portfolios with the most assets—our small-, small/mid-, and mid-cap portfolios. Our small but growing deep value portfolios, fledgling international strategies, and niche all-cap products do not have enough assets to make a large impact on the top holdings list.
First and foremost, the top six holdings all come from the top 10 holdings a year ago. Such a pattern has been common and likely will continue to be so. Of this group, two rose on the list, two dropped, and two stayed even
in their firmwide ranks. Note, however, that in all cases, we pared back on the stocks; they stayed toward the top of the list despite being pruned. One other stock from last year’s top 10 stayed in its same slot—#9 holding International Game Technology (IGT, Financial), which we bought on weakness in 2012.
Another key group here are the stocks that climbed the ranks of our holdings to join the top 10. That group includes International Speedway Corp. (ISCA, Financial), KKR & Co. L.P. (KKR, Financial), and Contango Oil & Gas Co. (MCF, Financial). In all cases we bought the stocks fairly substantially. International Speedway was a brand-new holding in our deep value strategy in 2011 so its share count skyrocketed when it entered our small-, small/mid- and mid-cap portfolios. When KKR saw its share price decline during 2012 without material long-term fundamental issues, we added to our position. With Contango, we were building our position due to rising confidence early in the year, and then late in the year, we bought when well-understood problems hit the stock worse than we thought warranted.
Finally, three stocks from 2011’s top 10 holdings fell out of that range in 2012 but remain in our portfolios—Mohawk Industries, Inc. (MHK, Financial), DeVry Inc. (DV, Financial) and Zimmer Holdings, Inc. (ZMH, Financial). In late 2011, Mohawk was a significant position in our small, small/mid and mid-cap portfolios, but it grew beyond the market cap boundary for small cap, and we sold it in mid cap because other opportunities abounded there. We still hold it in our small/mid value strategy. In the cases of both DeVry and Zimmer, our enthusiasm is more tempered than it had been as we think some of the forces underlying our thesis are less strong than we originally believed. That said, both stocks remain in our top 20 holdings firmwide, a clear sign we remain confident in them.
Now that we have dealt with the movements of individual holdings, we can address the clear theme that emerges when you run down our more recent top 10 holdings list: financial services stocks represent our favorite area. Note: as above we do not make top-down economic bets, so we are not saying that we are bullish on financial firms because of the current state of the economy or the position we find ourselves in the cyclical trend. Rather, we think many financial firms continue to be out of favor, largely as a result of the 2007-2008 financial crisis, and are cheap relative to their normalized growth prospects. Indeed, we think Wall Street is quite pessimistic regarding the earnings power of many financial companies going forward. Specifically, four of our top five holdings are financial stocks, and five of the top 10. We would note that none of these five companies are traditional, commercial banks. Rather, we have First American Financial Corp. (FAF, Financial), title insurance firm; Lazard Ltd (LAZ, Financial), a financial advisory (and asset management) company; Janus Capital Group Inc. (JNS, Financial), a pure asset manager; Jones Lang LaSalle Inc. (JLL, Financial), a real estate management specialist; and KKR, a publicly traded private equity shop. At the end of February 2013, all of these stocks traded at a forward P/E of 16x or lower. Given their long-term prospects, we think they are bargains.
The opinions expressed 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. Analyses and predictions are based on assumptions that may or may not occur, and different assumptions could result in materially different results.
This commentary discusses certain individual securities, which at the time of the interview were held in certain portfolios Ariel manages. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of a portfolio. Click on a portfolio’s “Holdings” tab on our web site, arielinvestments.com, for the most recent holdings in a portfolio.
Investing in equity stocks is more risky and subject to the volatility of the markets. Investing in small and mid-sized companies is more risky and more volatile than investing in large companies. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price.
Below is a list of our top 10 firmwide holdings (by assets) as of December 31, 2012, complete with the 2012 year-end firmwide rank, the 2011 year-end firmwide rank and the share count percentage change. We have also included the stocks that were in the top 10 at the end of 2011 but were not in that group this year.
Given our long-term focus and patient investing approach, you would expect to see heavy overlap between the 2011 top 10 and the top holdings in 2012—and you do. On the other hand, you would expect to see some changes unless somehow nothing happened for 365 days. We believe there are telling shifts in our top holdings over 2012. Before we comment further, it bears noting that all of the holdings in our top 10 will (almost by definition) come from the portfolios with the most assets—our small-, small/mid-, and mid-cap portfolios. Our small but growing deep value portfolios, fledgling international strategies, and niche all-cap products do not have enough assets to make a large impact on the top holdings list.
First and foremost, the top six holdings all come from the top 10 holdings a year ago. Such a pattern has been common and likely will continue to be so. Of this group, two rose on the list, two dropped, and two stayed even
in their firmwide ranks. Note, however, that in all cases, we pared back on the stocks; they stayed toward the top of the list despite being pruned. One other stock from last year’s top 10 stayed in its same slot—#9 holding International Game Technology (IGT, Financial), which we bought on weakness in 2012.
Another key group here are the stocks that climbed the ranks of our holdings to join the top 10. That group includes International Speedway Corp. (ISCA, Financial), KKR & Co. L.P. (KKR, Financial), and Contango Oil & Gas Co. (MCF, Financial). In all cases we bought the stocks fairly substantially. International Speedway was a brand-new holding in our deep value strategy in 2011 so its share count skyrocketed when it entered our small-, small/mid- and mid-cap portfolios. When KKR saw its share price decline during 2012 without material long-term fundamental issues, we added to our position. With Contango, we were building our position due to rising confidence early in the year, and then late in the year, we bought when well-understood problems hit the stock worse than we thought warranted.
Finally, three stocks from 2011’s top 10 holdings fell out of that range in 2012 but remain in our portfolios—Mohawk Industries, Inc. (MHK, Financial), DeVry Inc. (DV, Financial) and Zimmer Holdings, Inc. (ZMH, Financial). In late 2011, Mohawk was a significant position in our small, small/mid and mid-cap portfolios, but it grew beyond the market cap boundary for small cap, and we sold it in mid cap because other opportunities abounded there. We still hold it in our small/mid value strategy. In the cases of both DeVry and Zimmer, our enthusiasm is more tempered than it had been as we think some of the forces underlying our thesis are less strong than we originally believed. That said, both stocks remain in our top 20 holdings firmwide, a clear sign we remain confident in them.
Now that we have dealt with the movements of individual holdings, we can address the clear theme that emerges when you run down our more recent top 10 holdings list: financial services stocks represent our favorite area. Note: as above we do not make top-down economic bets, so we are not saying that we are bullish on financial firms because of the current state of the economy or the position we find ourselves in the cyclical trend. Rather, we think many financial firms continue to be out of favor, largely as a result of the 2007-2008 financial crisis, and are cheap relative to their normalized growth prospects. Indeed, we think Wall Street is quite pessimistic regarding the earnings power of many financial companies going forward. Specifically, four of our top five holdings are financial stocks, and five of the top 10. We would note that none of these five companies are traditional, commercial banks. Rather, we have First American Financial Corp. (FAF, Financial), title insurance firm; Lazard Ltd (LAZ, Financial), a financial advisory (and asset management) company; Janus Capital Group Inc. (JNS, Financial), a pure asset manager; Jones Lang LaSalle Inc. (JLL, Financial), a real estate management specialist; and KKR, a publicly traded private equity shop. At the end of February 2013, all of these stocks traded at a forward P/E of 16x or lower. Given their long-term prospects, we think they are bargains.
The opinions expressed 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. Analyses and predictions are based on assumptions that may or may not occur, and different assumptions could result in materially different results.
This commentary discusses certain individual securities, which at the time of the interview were held in certain portfolios Ariel manages. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of a portfolio. Click on a portfolio’s “Holdings” tab on our web site, arielinvestments.com, for the most recent holdings in a portfolio.
Investing in equity stocks is more risky and subject to the volatility of the markets. Investing in small and mid-sized companies is more risky and more volatile than investing in large companies. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price.
