Plenty of people talk about "endpoint sensitivity," but oftentimes they miss half the story. That is, in a data series there are really two endpoints—the last one and the first one. As standardized one-year, three-year, and five-year periods roll along, people focus great attention on the most recent month and tend to forget about the month that "goes away." Making this mistake in 2014 could prove harmful when examining five-year returns.
Below are some recent returns for Ariel Fund. One reason we have selected our flagship mutual fund for this illustration is because its relative performance recently has been quite stable. Over the five years ended February 28th, 2014, it was the top-performing fund in Morningstar's Mid-Cap Blend category. It remained on top for the five-year period as of March 31* . At first glance, however, its absolute returns look like they changed a lot in one month:
Here is how the five-year return as of Fe bruary 28, 2014, can be seen: it started wi th a +13.14% return in March 2009, then ha d 59 months that totaled a +278.06% cumulative return. Together that made for a +327.75% cumulative return due to the wonder of compounding. Four weeks later, you have a +278.06% 59 -month gain and then a -0.83% loss, which comes out to a +274.92% cumulative return. Were this simply a one-month phenomenon, we would not spend so much time on the topic. It is very far indeed from a one- month event. Below are the monthly return s for Ariel from the last nine months of 2009—these are the months that will "go away" from the front-end of the five-yea r return as we progress through 2014.
As you can see, 2009 featured some ginormous monthly gains. On ly May and June of 2009 look like monthly figures; the rest frankly look more like annual gains (or an annual loss as in Octo ber). So you should brace yourself for absolute five-year ret urns that appear volatile going forward. This will be true not just for Ariel Fund or all of our portfolios, but for the investment s you own generally. Unless 2014 features some heroic returns, the absolute gains of the investments in y our portfolio will appear to dr op when viewed through the standardized five-year window. There ar e two key things to remember. First, when a five-year number goes down this year, it probably does not mean poor recent performance—it likely means the "l oss" of good performance from 2009. Second, and even more importantly, that performance from 2009 does not actually go away —the standardized sixty-month window simply does not capture it any more . This is one of the huge reasons we re mind investors to examine since-inception returns: they are the most statistically valid returns because th ey hold the most information, an d, just as importantly, they do not ignore any return data.
The opinions expressed are current as of the date of this comme ntary but are subject to change. The information provided in thi s commentary does not provide information reas onably 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 small and mid-cap stocks is more risky and more vo latile than investing in large cap stocks. The intrinsic value o f the stocks in which the Fund invests may never be recognized by th e broader market. Ariel Fund often invests a significant portion of its assets in companies within the financ ial services and consumer discretionary se ctors and its performance may suffer if thes e sectors underperform the overall stock market . Performance data quoted represents past performance. Past performance does not guarantee future results. All performance assumes the reinvestme nt of dividends and capital gains and represents returns of th e 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. For the period ended March 31, 2014, the average annual total returns of Ariel Fund (Investor Class) for the one- , five- and ten-year periods were +23.74%, + 30.25% and +7.37%, respectively. Ariel Fund 's Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2013.
Pe rformance data current to the most recent month-end for Ariel Fund may be obtained by visiting our web site, arielinvestments.com. Investors should consider carefully the inve stment 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, c all us at 800-292-7435 or visit our web site, arielin vestments.com. Please read the prospect us or summary prospectus carefully befo re investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC