As we look back upon our own monthly commentaries thus far in 2013, we find a recurring theme: What appears attractive to us and to the broad investment community right now? In January, we wrote about the relative allures of stocks and bonds—and the possibility of a great rotation to equities. In February, we examined our top 10 firmwide holdings at the end of 2012 versus the end of 2011 in order to showcase what the difference suggested. After addressing how we calculate capacity in March, our April commentary discussed what the last few years' worth of fund flows and category returns say about investors' tastes for risk and reward. This month, we address another angle on this broad topic: how attractive are U.S. stocks at this point in time?
We are answering the question because in one way or another it seems to be coming up consistently, or even constantly. In headlines, meetings with clients and prospects, and among professional investors it is a fairly hot topic, and as such a controversial one. A couple of years ago, it was conventional wisdom that stocks were a bad, risky bargain given the woeful global economy versus historically more stable bonds. (So much for conventional wisdom, by the way.) Now, however, there seems to be a more balanced debate. Investors have widely recognized that: the stock market is up more than 150% since March 9, 2009; the economy seems to be slowly but surely improving; relative to bonds going forward, stocks may well be a less risky proposition. On the other hand, naysayers continue to fret about the relatively long market climb since 2009, the overall valuation of stocks relative to certain periods in history, as well as a choppy global economy.
While we lean toward the camp of the bulls on the general talking points, as independent thinkers we prefer a far different perspective on the issue at hand. That is, rather than debate whether or not the broad stock market is attractive, we prefer to ask whether or not we are able to find new ideas that appear valuable based on our rigorous, intrinsic valuation methodology. As active managers, so long as we can find a handful of new holdings that are attractive, as investors it would not much bother us if the rest of the market were overvalued.
In the mutual funds behind our long-standing flagship strategy—Ariel Fund, Ariel Appreciation Fund and Ariel Focus Fund—we have found two new holdings thus far in 2013. That may not sound like many, but generally speaking we only find a handful during many full calendar years. Specifically, we have added MTS Systems Corp. (MTSC) and Coach Inc. (COH). MTS Systems specializes in physical testing equipment and occupies a key, important niche for manufacturing firms that are doing more and more virtual testing—but in our view are unlikely to abandon actual real-world tests. As you know, Coach is a global fashion brand headquartered in the U.S. and focused largely on aspirational handbags. Upstart Michael Kors has frightened some growth investors off from time-tested Coach, but we believe the firm's well-deserved reputation for quality and inroads into China make it a very solid value.
In our deep value Ariel Discovery Fund, we have five new positions. As you know, Discovery homes in on very small stocks and leans heavily on companies that look cheap relative to their assets. Spartan Motors Inc. (SPAR) designs, engineers and manufactures specialized motor vehicle chassis and bodies--especially for fire trucks, motor homes, and military vehicles. Although it is expected to be profitable this year, it is very cheap on a book basis, especially given its excess cash. Pozen Inc. (POZN) is a unique pharmaceutical company that has successfully developed treatments combining existing approved therapies in new compounds. Roughly half of its market capitalization is in cash. Tellabs, Inc. (TLAB) is a struggling telecommunications equipment provider that we believe to be trading below liquidation value. Gulf Island Fabrication, Inc. (GIFI) makes drilling platforms in the Gulf of Mexico for natural resource exploration companies. Although we believe it will be returning to profitability soon—possibly in 2013—it trades just above book value. Emergent Biosolutions, Inc. (EBS) makes BioThrax, the only approved vaccine for anthrax. Although it is profitable and has a large government contract in place, it trades at roughly 1.2x book value (much of which is in cash).
As you can see, not only have we been able to locate quite a few new investment opportunities in our U.S. mutual funds, but they come from distinctly different sectors. In other words, different areas of the economy continue to produce good stock values, at least in our view. As always, we will continue to scour the markets for other potential holdings—and if we begin to struggle with idea generation, that is when we will be more likely to change our optimistic tune.
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 5/31/13, MTS Systems Corp. comprised 0.8% of Ariel Fund; Coach Inc. (COH) comprised 2.3% of Ariel Appreciation Fund; Spartan Motors Inc. comprised 1.9% of Ariel Discovery Fund; Pozen Inc. comprised 3.9% of Ariel Discovery Fund; Tellabs, Inc. comprised 1.5% of Ariel Discovery Fund; Gulf Island Fabrication, Inc. comprised 1.5% of Ariel Discovery Fund; and Emergent Biosolutions, Inc. comprised 1.8% of Ariel Discovery Fund.
Holdings are subject to change.
Investing in equity stocks is more risky and subject to the volatility of the markets. Investing in micro-, small and mid-sized companies is more risky and more volatile than investing in large companies.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current summary prospectus or full prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC.