Investing in small- and mid-cap stocks is riskier 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. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors, and its performance may suffer if these sectors underperform the overall stock market.
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. For the period ended March 31, 2015, the average annual total returns of Ariel Fund (Investor Class) for the 1-, 5- and 10-year periods were +19.54%, +16.12% and +7.89%, respectively. Ariel Fund’s Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2014. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.
Quarter Ended March 31, 2015
Capital markets were rather erratic in the first quarter of 2015, showing little discernable pattern to translate into a simple characterization of investor sentiment. In January, U.S. bonds were up more than +2%, U.S. large and small caps were both down at least -3%, and foreign stocks were up less than +1%. That looks a lot like risk aversion. February, however, saw a huge reversal: U.S. large caps and small caps, as well as international stocks were all up nearly +6%, while U.S. bonds fell nearly -1%. It was clearly a bullish month, or as some would have it, a risk-embracing environment. March was a lot less clear: U.S. bonds and small caps rose less than +1%, international equities lost a bit but were essentially flat, and U.S. large caps fell nearly -2%. To our minds, such an environment translates as a stock-picker’s market, where the individual securities owned can make a big difference. A majority of our portfolios outperformed with some doing so quite strongly.
This quarter, Ariel Fund jumped +6.67% and finished ahead of the Russell 2500 Value Index’s +3.02% gain, as well as the +1.98% rise of the Russell 2000 Value Index.
Some of our holdings posted solid gains for the quarter. Diversified health- care company Hospira, Inc. (HSP, Financial) jumped +42.86% on the good news of its acquisition. In early February, Hospira entered into a definitive merger agreement with Pfizer Inc. (PFE, Financial) for $ 90 per share in cash—a total enterprise value of roughly $17 billion. Shares rose about 35% the day of the announcement. We had long seen Hospira as a good stand-alone company and a very attractive acquisition target. We exited the position on the news. Also, industrial sand provider U.S. Silica Holdings, Inc. (SLCA, Financial) soared +39.18% as its industry recovered from undue pessimism. In the wake of falling commodity prices, Silica and its competitors saw their stocks fall in late 2014. Silica actually did not post stellar short- term numbers, but other sand providers did and as a result, the stocks were up nicely. Most importantly, it became clearer to the market that falling commodity prices do not indicate falling short-term demand for this important industrial product.
Other holdings fell in the turbulent three-month period. Natural gas and oil producer Contango Oil & Gas Co. (MCF, Financial) declined -24.76% along with falling oil prices amidst a weak quarter. Admittedly, the company’s $1.05 per-share loss was more than the expected $ 0.05 loss. The miss was largely caused by lower-than-expected production and lower average sale prices. We think, however, Contango can and will adjust nimbly to commodity price shifts and, on that score, has an advantage over its competition. We assess the company largely on its strong finances and significant asset values. In addition, helicopter services company Bristow Group Inc. (BRS, Financial) dropped - 16.81% in sympathy with oil prices. Global oil prices have plummeted roughly -50% in the past six months, driving investors to sell companies connected to oil and gas exploration. Bristow’s contracts are long term and more tied to ongoing production than Wall Street seems to realize. As such, we think the sell-off was an overreaction.
During the quarter, we initiated one new position and eliminated two holdings in Ariel Fund. We added chainsaw chain maker Blount Intl, Inc. (BLT, Financial), a current holding in our small cap value portfolio. Blount produces saw chains, bars and sprockets, as well as outdoor equipment accessories and parts for the garden and landscape industry. It sells its products in more than 100 countries around the world. We sold our shares of City National Corp. (CYN, Financial) on the good news that it was being acquired by the Royal Bank of Canada (RY, Financial) for $5.4 billion, roughly half in cash and half in stock. We also sold our shares of Hospira, Inc. when it entered a definitive merger agreement with Pfizer Inc., an all-cash deal totaling about $17 billion.
We are becoming more cautious than optimistic toward equities. We think investors should be prepared for a correction, although we do not endorse market timing and do not think it is time for a major portfolio shift. The current bull market, which mostly dates back to March 9, 2009, has persisted far longer than most. Over that period, annualized returns have been tremendous, nearly double the long-term yearly average; some reversion to the mean seems nearly inevitable. Finally, in the United States, the current price/earnings (P/E) ratio for both large and small caps hovers around 18x. That is pricier than long-term averages of between 15x and 16x. We are concerned largely with valuation, and we do expect the U.S. economy to continue to grow. We also think evidence shows that the worst bear markets tend to occur when economic cycles peak alongside high equity valuations. We do not see that scenario occurring. In the meantime, we continue to strive to identify and purchase mispriced stocks of businesses that are better than the market price suggests.
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 03/31/15, Hospira, Inc. 0.0% of Ariel Fund; Pfizer Inc. 0.0%; U.S. Silica Holdings, Inc. 2.1%; Contango Oil & Gas Co. 1.6%; Bristow Group Inc. 2.9%; Blount Intl, Inc. 2.0%; City National Corp. 0.0%; and Royal Bank of Canada 0.0%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.
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/book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small- cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price/book ratios and lower forecasted growth values. 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 on the basis of a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights.
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 website, 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.
