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John Rogers' Ariel Funds September Commentary

Holly LaFon

Holly LaFon

266 followers
Although it may be hard to believe, the crash of Fall 2008 was a half-decade ago. At the time, the market was signaling the U.S., and therefore the world, was on the precipice of financial disaster. With that in mind, we read through our writings from that time to see what message they have for us now. The first thing we noticed: as is often the case, the realities of the present shape our memories of the past. Specifically, because we did not go over the edge and did in fact achieve stability, most people today take that outcome as a foregone conclusion. So the commentariat has the luxury of pointing toward mistakes rather than appreciating the achievements of that period; we think a far more balanced view is wise. We also noticed that even amidst such turbulence and carnage, it was possible to look past the particulars and see the big picture. That lesson remains important today. September 2008 was a month of tremendous upheaval with many, many moving parts. Today, however, conventional wisdom boils it down to one event—the "mistake" that Lehman was allowed to go bankrupt. That summary strikes us as Monday-morning quarterbacking. In the quarterly commentary from September 30, 2008 we wrote:

The market volatility, velocity of change, and scale of transformation we experienced in September 2008 were unprecedented. . . . . Still, we would argue the fundamental metamorphosis of the financial services industry was far more important and nerve-wracking. Of the 25 largest publicly-traded U.S. financial services companies this time last year, nine of them underwent radical transformations in September 2008. The government took control of Fannie Mae (FNM), Freddie Mac (FRE), and AIG (AIG). Lehman Brothers was not so lucky, declaring bankruptcy. Merrill Lynch (MER), Washington Mutual, and Wachovia (WB) all sold themselves at distressed prices. Finally, Morgan Stanley (MS) and Goldman Sachs (GS) became bank holding companies in order to avoid ending up like Merrill or Lehman. The financial world has already changed radically and will take more time to stabilize.


At the time, Lehman was one of nine hugely important financial companies in dire straits. To be sure, it was the exception because it failed. On the other hand, the other eight worked out well. The government seized three companies that are now prospering. Fannie and Freddie saw their businesses settle quickly and are now back to record profits. AIG took longer to recover, but in the past two years its stock has more than doubled. With the government's oversight and counsel, Bank of America (BAC), JPMorgan Chase & Co. (JPM), and Wells Fargo (WFC) have successfully integrated Merrill, WaMu, and Wachovia. Moreover, the acquirers have absorbed the damages from the past and have gone back largely to business as usual. Finally, smart thinking and a willingness to undergo significant change allowed Morgan Stanley and Goldman Sachs to survive. We should all recognize, however: without quick and material transformation, they could have suffered Lehman's fate or needed rescue. Altogether, after the financial world stabilized, it came to feel pretty similar to the way it was before the crash. That speaks to the resiliency of our wonderful, capitalist system but also to the smart thinking and proper actions that helped save the other eight companies that were clearly in deep trouble at the time.

Throughout the crash period, however, Ariel Investments was quite clear that normalcy would return. Moreover, we expected big gains to come. At the end of October 2008, we wrote:

[W]hen the whole world is consumed with fear about the economy, irrational panic and paralysis occur. Waves of chaotic selling invariably lead to unreasonably low valuations and thus spectacular opportunities for the disciplined, brave investor. That is where we arrived in October 2008: when the market seems to be the worst, it is counter-intuitively the best time to buy. So like our role model, Warren Buffett, we believe that the market now is very cheap, and thus enticing. Ten years from now, when many people look back at Fall 2008, we believe they will realize they missed a tremendous buying opportunity. Our clients will not be among that wistful group.


True, we are only halfway to the point when we predicted regret for those who sold during the crash, and yet we think the results already tell the tale:

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Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end for the Fund may be obtained by visiting arielinvestments.com. The extraordinary performance shown for the recent short-term period(s) may not be sustainable and is not representative of the performance over longer periods.

As you can see, global as well as U.S. equities have delivered fantastic returns over the past five years. Those who bought an index fund when blood ran in the streets have done well. Active investors who sensed opportunity had a good chance to outperform, as our smaller-cap products have done. Meanwhile, those who rushed to bonds for protection may have received it, but their returns have been meager since that time.

As we write, some are beginning to get nervous about government funding. Specifically, the government partially shut down non-essential services on October 1, 2013 and mid-month the U.S. is due to reach its debt ceiling again. While we do not dismiss any short-term disruptions and think there is a chance the markets will wobble this month, over the long-term we firmly believe for investors this short-term situation is not a big deal.

In our view, the more the masses worry, the more likely there are good opportunities to invest for independent thinkers.

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. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestment of dividends and capital gains and represents returns of the Investor Class shares. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end may be obtained by visiting our website, arielinvestments.com. The extraordinary performance shown for some of the recent short-term periods may not be sustainable and is not representative of the performance over longer periods.

For the period ended September 30, 2013, the average annual total returns of Ariel Fund (Investor Class) for the one-, five- and ten-year periods were +33.28%, +13.07% and +7.94%, respectively. For the period ended September 30, 2013, the average annual total returns of the Russell 2500 Value Index for the one-, five- and ten-year periods were +27.58%, +11.07% and +10.03%, respectively. Ariel Fund's Investor Class shares had an annual expense ratio of 1.06% for the year ended September 30, 2012. For the period ended September 30, 2013, the average annual total returns of Ariel Appreciation Fund (Investor Class) for the one-, five- and ten-year periods were +34.31%, +14.68% and +9.01%, respectively. For the period ended September 30, 2013, the average annual total returns of the Russell Midcap Value Index for the one-, five- and ten-year periods were +27.77%, +11.86% and +10.91%, respectively. Ariel Appreciation Fund's Investor Class shares had an annual expense ratio of 1.17% for the year ended September 30, 2012. For the period ended September 30, 2013, the average annual total returns of Ariel Focus Fund (Investor Class) for the one-year, 5-year and since inception periods were +28.02%, +7.99% and +5.01% respectively. Ariel Focus Fund has an inception date of June 30, 2005, and does not yet have annual performance for the ten-year period. For the period ended September 30, 2013, the average annual total returns of the Russell 1000 Index for the oneyear, 5-year and since inception periods were +22.30%, +8.86% and +5.80% respectively. As of September 30, 2012, Ariel Focus Fund had an annual expense ratio of 1.25% and a gross expense ratio of 1.58%. Ariel Investments, LLC, the adviser to the Ariel Focus Fund, is contractually obligated to waive fees or reimburse expenses in order to limit the Fund's total annual operating expenses to 1.25% of net assets for the Investor Class shares through the end of the fiscal year ending September 30, 2014. No termination of this agreement by either the Board of Trustees or the Adviser may be effective until, at the earliest, October 1, 2014. Performance data current to the most recent month-end for our funds may be obtained by visiting our web site, arielinvestments.com.

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.

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.

As of 09/30/13, Morgan Stanley comprised 0.0% of Ariel Fund; Goldman Sachs 0.0%; Bank of America 0.0%; JPMorgan Chase & Co. 0.0% and Wells Fargo 0.0%. As of 09/30/13, Morgan Stanley comprised 0.0% of Ariel Appreciation Fund; Goldman Sachs 0.0%; Bank of America 0.0%; JPMorgan Chase & Co. 0.0% and Wells Fargo 0.0%. As of 09/30/13, Morgan Stanley comprised 3.1% of Ariel Focus Fund; Goldman Sachs 3.2%; Bank of America 0.0%; JPMorgan Chase & Co. 2.7% and Wells Fargo 0.0%. Holdings are subject to change.

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 or click here. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC.

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 Midcap® Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-tobook ratios and lower forecasted growth values. The Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes' trademarks, service marks and copyrights. 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 market. MSCI ACWI (All Country World Index) IndexSM is an unmanaged, market weighted index of global developed and emerging markets. The U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollardenominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. The U.S. Aggregate rolls up into other Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.
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