In the investing world, the worst of times can be the best of times to buy. The markets provided that lesson once again to investors over the last five years. A half-decade ago, with panic at generational highs and expectations near all-time lows, the market bottomed on March 9, 2009. As a result, the five-year results you see ending February 28, 2014 are likely the best month-end returns you will see for a long time. Before we get to those numbers, however, we would like to look back at our view exactly five years ago in the February 2009 commentary.
Recall that neither we nor anyone could "call the bottom" back then. Indeed, looking straight into the rearview mirror, the financial press was doing close to the opposite, "reporting extensively about the so-called 'lost decade.'" The prevailing notion was that the negative 10-year return for the stock market shattered the status of stocks as a good long-term investment. We noted, however, that "[s]ince the beginning of 1929, the stock market has had negative 10-year returns at month-end only 9% of the time, and only 5% of the time after the Great Depression's damage." Moreover, these "lost" decades tended to be closer to market bottoms than signposts on the way to further losses: We noted that buying "at the end of a difficult 10-year stretch, even if the economy is in poor shape, tends to yield good results rather than bad ones." We used the strong decade-long periods immediately succeeding the negative 10-year returns from December 1974 and August 1982 to make the point. We ended with our core conclusion: "History tells us, however, this is the time to shove fear in the closet, think rationally, and ponder the next 10 years rather than the ten that just ended."
Obviously we have just five years of results to report since that statement, but we think you will agree the stock market has been quite solid thus far. Below are the annualized and cumulative returns of the core indexes we have tracked since March 1, 2009.
Note first that these returns roughly double their very long-term averages. Second, they generally follow history, with smaller stocks outperforming larger stocks. Finally, note that bonds, where assets flowed heavily throughout the past five years, had returns close to their long-term average but a bit below it.
Just how good have the last five years been for the market? We examined rolling returns to look at all the five-year periods on a month-by-month basis since January 1, 1926—999 of them in all. For the period just ended, the S&P 500 Index ranked 59—a return in the top 6% of all those periods. And that, of course, only addresses the market overall.
Active managers had the opportunity to add value, but on balance most did not. For instance, Morningstar's Mid-Cap Blend category is home to our longest-tenured funds, Ariel Fund and Ariel Appreciation Fund. The average mid blend fund gained +24.92% over the past five years, a good absolute return but short of the prevailing index's +27.84% return. Of the 307 mid-cap blend funds, 260 had returns between +20% and +30%. A handful of funds did much better and some did much worse than the pack. Our longest-tenured funds are in the former group, and we strongly believe it was for two connected reasons. Our early 2009 confidence that equities would recover drove us to be very aggressive on price in picking our stocks. That informed opportunism led to the results below:
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 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. Past performance is no guarantee of future results. Investing in equity stocks is risky and subject to the volatility of the markets. Investing in small cap and mid-cap stocks is more risky and more volatile than investing in large cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. An actively managed portfolio is more risky than a passively managed portfolio that replicates an index because it contains fewer stocks than its benchmark. The Funds concentrate a significant portion of their assets in the financial services and consumer discretionary sectors, and performance may suffer if these sectors underperform the overall stock market. For the period ended December 31, 2013, the average annual total returns of Ariel Fund (Investor Class) for the one-, five- and ten-year periods were +44.68%, +26.01% and +8.18%, respectively. Ariel Fund's Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2013. For the period ended December 31, 2013, the average annual total returns of Ariel Appreciation Fund (Investor Class) for the one-, five- and ten-year periods were +46.21%, +25.81% and +9.05%, respectively. The Fund's Investor Class shares had an annual expense ratio of 1.13% for the year ended September 30, 2013.
*For the period ended February 28, 2014, the rankings of Ariel Fund for the one- and ten-year periods were 103 out of 395 funds and 135 out of 191 funds, respectively, among Morningstar Mid-Cap Blend funds. For the period ended February 28, 2014, the rankings of Ariel Appreciation Fund for the one- and ten-year periods were 84 out of 395 funds and 100 out of 191 funds, respectively, among Morningstar Mid-Cap Blend funds. Morningstar, Inc. is a nationally recognized organization that reports performance and calculates rankings for mutual funds. Rankings are based on total returns. Morningstar ranks each fund relative to all funds in the same category.
Bonds are fixed income securities in that at the time of the purchase of a bond, the amount of income and the timing of the payments are known. Risks of bonds include credit risk and interest rate risk, both of which may affect a bond's investment value by resulting in lower bond prices or an eventual decrease in income. Treasury bonds are issued by the government of the United States. Payment of principal and interest is guaranteed by the full faith and credit of the U.S. government, and interest earned is exempt from state and local taxes.
The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. 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 market cap and current index membership. 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-to-book ratios and lower forecasted growth values. The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies. 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 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. The U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, 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. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
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