Investing in equity stocks is risky and subject to the volatility of the markets. Investing in small and mid-size companies is riskier and more volatile than investing in large companies. The intrinsic value of the stocks in which the portfolio invests may never be recognized by the broader market. Ariel Focus Fund is a nondiversified 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. For the period ended June 30, 2015, the average annual total returns of Ariel Focus Fund (Investor Class) for the 1-year, 5-year and 10-year periods were -0.48%, +14.15% and +5.68%, respectively. As of September 30, 2014, Ariel Focus Fund’s Investor Class had an annual net expense ratio of 1.08% and a gross expense ratio of 1.40%. Effective February 1, 2014, Ariel Investments, LLC, the Adviser, has contractually agreed to waive fees or reimburse expenses (the "Expense Cap") in order to limit Ariel Focus Fund's total annual operating expenses to 1.00% of net assets for the Investor Class through the end of the fiscal year ending September 30, 2016. The Expense Cap prior to February 1, 2014 was 1.25% for the Investor Class. Performance data current to the most recent month-end for Ariel Focus Fund may be obtained by visiting our website, arielinvestments.com.
Quarter Ended June 30, 2015
For most of the second quarter, stocks were up fairly nicely at home and abroad—until the final few sessions. As news out of Puerto Rico and especially Greece worsened, stocks fell sharply. In the last two trading days of the quarter, the foreign stock MSCI EAFE Index dropped -2.97%, the U.S. large-cap S&P 500 Index fell -1.81%, and the U.S. small-cap Russell 2000 Index retreated -2.01%. To our minds, these sell -offs were not based on economic exposures but on an expansive sense of risk and, ultimately, on fear. The volatility extended to other asset classes: long U.S. bonds were up roughly +1.5% while high-yield bonds were off about -0.5% in those two days. Altogether, it meant most major stock indexes we track had roughly flat returns.
This quarter, Ariel Focus Fund fell -0.80%, behind the Russell 1000 Value Index’s +0.11% gain, as well as the +0.28% gain of the S&P 500 Index.
Some of our holdings had good returns for the quarter. Toolmaker Stanley Black & Decker, Inc. (SWK, Financial) jumped +10.92% due to strong earnings. The market expected the company to earn $0.95 per share, while it managed to make $1.07. Revenues, gross margins and operating margins all advanced. We continue to see the company as having and nicely defending a good competitive position. In addition, investment bank Goldman Sachs Group, Inc. (GS, Financial) rose +11.42%, as it continued to be in a good spot. It did not have any particularly surprising news, but as the market advanced, big financial firms strongly outperformed. The market continues to see Goldman as one of the top leaders in the broad industry, and we agree with that sentiment.
Other holdings slid in the volatile three-month period. Defense and aeronautics company Lockheed Martin Corp. (LMT, Financial) fell -7.68%, despite an earnings beat. Specifically, the company announced earnings of $2.74 per share; the Wall Street estimate had been $ 2.50. Revenues were actually a bit short of expectations, so the market took the stock down a bit, given its relatively full valuation. We continue to see it as a very high-quality enterprise with a strong competitive advantage. Also, natural gas explorer Chesapeake Energy Corp. (CHK, Financial) declined -20.65% as clouds continued to hang over the stock. The price of natural gas has declined nearly 40% over the past 12 months, and Chesapeake has become a favorite for short sellers as short interest has nearly quadrupled in just more than six months. Declines in prices for both natural gas and crude oil have brought increased scrutiny to Chesapeake debt level. We continue to own the stock.
During the quarter, we did not initiate any new positions nor did we eliminate any holdings in Ariel Focus Fund.
As we write, markets are particularly volatile, so there is no telling which way things will turn. We could see the current turmoil transform into a one- or two -week blip or the beginning of a more extended slide. As we have noted before many times, we think nobody can time the market with any reasonable consistency. So we have no special insight into where stocks are heading the rest of this month or quarter or even year. We do, however, have a fairly strong point of view that markets are overreacting. To be sure, the response is more muted than in 2011 and 2012, when there were reasonable worries about contagion. But at this point, the possibility of Greece exiting the European Union or Puerto Rico defaulting on its bonds has been very well-signaled and appropriately contained in advance. We do not think either entity has the power to disrupt the global economy, especially the U.S. economy. Therefore, if the market follows fundamentals, we think a fairly quick recovery is in order.
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 06/30/15, Stanley Black & Decker, Inc. 5.8%; of Ariel Focus Fund; Goldman Sachs Group, Inc. 3.9%; Lockheed Martin Corp. 4.7%; and Chesapeake Energy Corp. 1.8%. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Focus Fund.
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/book ratios and lower expected growth values. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index, representing approximately 92% of the total market capitalization of that index. It includes approximately 1000 of the largest 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. 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.
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.
