Domestically, Ariel hunts for value primarily amongst the small- and mid-cap universes. We also scour the globe for international companies of all sizes for our international and global portfolios. The aforementioned benchmarks track the performance of these asset classes.
All the major equity indexes have generated strong double digit returns. In the large- and mid-cap universes, growth has continued to outperform value, while the opposite has been true within small-cap and international equities.
As we enter the second half of the year, U.S. equity valuations remain elevated but not at extremes. The BNY Mellon data for the Russell 2000 dates back to 1999. Since that time, its forward P/E ratio has averaged 17.6X. At the end of the second quarter of 2017, it reached 19.3X. This is certainly at a historically significant level but still well below the peak of 28.1X reached in 2001.
Warren Buffett (Trades, Portfolio) once famously said, “In the business world, the rearview mirror is always clearer than the windshield.” Today, those words seem particularly true about the growing disruptions that are challenging some of the most iconic corporate brands. Changes driven by social media and lifestyle have proven to be disruptive to venerable brands here in the United States. Nowhere has that impact been felt more than in the packaged food space. For over a century, brands like Kellogg Co. (K, Financial), Campbell Soup Co. (CPB, Financial) and Kraft Heinz Co. (KHC, Financial) have dominated the market of prepared foods, offering affordable and convenient products for busy families. A recent WSJ piece entitled “So Long, Hamburger Helper: America’s Venerable Food Brands are Struggling”1 took a deep look into the phenomenon. Much like the fables of Aesop, there is a classic business lesson to be learned from the plight in the packaged goods industry. No matter how strong your brand and how stable your revenues, you cannot rely on past success to build your future—brands must adapt to remain relevant. In the case of the leading American food brands, the shift among consumers to healthy, natural, organic food has provided an opening for new players, increasing the competition in a space that had previously maintained high barriers to entry. As investors, it reminds us that we constantly have to understand the moat 2 that surrounds a business and the threats that exist to that moat. One thing we know for sure: this is not the first industry that has faced this dilemma and it certainly will not be the last. As contrarian investors, we look at these changes as learning opportunities, helping us to recognize and discuss similar transformations that may impact companies we own. In doing so, we have the opportunity to continually challenge ourselves and grow as investors, which we believe will result in the continued ability to generate alpha for our clients.
This commentary candidly discusses a number of individual companies, none of which were held in Ariel’s portfolios at the time the commentary was published. Portfolio holdings are subject to change. Visit arielinvestments.com for schedules of holdings. The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do 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 does not guarantee future results. Investing in equity stocks is risky and subject to the volatility of the markets. Investing in micro, small and mid-cap companies is more risky and more volatile than investing in large companies. The intrinsic value of the stocks in which a value portfolio invests may never be recognized by the broader market. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. The use of currency derivatives and exchange-traded funds (ETFs) may increase investment losses and expenses and create more volatility. Investments in emerging markets present additional risks, such as difficulties in selling on a timely basis and
