4 Interesting Ariel Investments Holdings

A recent note from John Rogers (Trades, Portfolio)' Ariel Investments struck me as particularly outspoken. It seems like they really wanted to make a point what they stand for (emphasis mine):

"In a world where the herd mentality seemingly dominates and influences markets, it takes courage and independence to go against the grain. Our contrarian stance is based on extensive research and industry expertise, not instinct. Although our bottom-up effort results in a financial service sector underweight, Ariel’s domestic and global portfolios benefit greatly from strong selection within the sector."

The firm wants to set itself apart not just from the herd, but also from contrarian competitors that do less research.

"At Ariel, we pride ourselves on identifying quality, undervalued names of consistently growing companies that for some reason are overlooked. As is the case across all industry sectors, we seek holdings possessing unique business models with sustainable competitive advantages. In contrast to the homogenous sea of commodity-like financial services companies as is the case with most commercial banks and traditional insurers that dominate the value indices, we require proof of some source of differentiation or franchise quality."

The table below shows their top 100 positions ranked by weight:

Recently, I wrote about Charles Bobrinskoy’s favorite ideas, KKR (KKR, Financial) and Lazard (LZ), which are discussed again as high-conviction holdings (emphasis mine):

"Two high-conviction holdings within our domestic traditional value strategies are leading financial advisory and traditional asset management firm Lazard Ltd. and alternative asset manager KKR & Co. L.P. Both companies are excluded from the major indices due to their structure as publicly-traded partnerships. Lazard offers world-class merger and acquisition capabilities, strong restructuring advisory services and a solid but widely ignored global and emerging market asset management business. Additionally, the company has significant brand and franchise value. KKR manages investments across multiple asset classes, including private equity. This asset class hasfavorable economics where pools of capital are held for extended time periods. The investor generally pays to buy into the fund, an annual management fee on the assets and then surrenders a share of the profits following realization. With the newly lowered corporate tax rate, both firms are exploring the idea of becoming corporations, as opposed to partnerships. This potential change could translate to new shareholders, possible inclusion in the major indexes and may lead to a higher public valuation and share price."

Â

The recent commentary also reveals some of the holdings in the global portfolios.

"Our global portfolios have positions in diversified financial services companies as well. We believe exchanges such as our Deutsche Boerse AG holding will benefit from rising rates in the derivatives and clearing house business units."

A new holdings that is discussed is American Express (AXP, Financial):

"We also have a stake in fee-based American Express, which profits from spending activity on credit cards rather than revenue from lending. Another source of differentiation within the sector is our investment in Daito Trust Construction, which generates income from building and renting out apartments as opposed to lending money or taking on balance sheet risk.With many benchmark tracking funds chasing the same assets, there is room for the discerning investor to find opportunities in areas that are neglected. Investing takes fortitude, discipline, extensive research and patience."

Very interestingly, you will find all these companies trade at significant earnings multiples (except for KKR):

• American Express: 31 times.
• Lazard: 28 times.
• Deutsche Boerse (XTER:DB1, Financial): 28 times.
• KKR: 10 times.

They also have quite modest forward earnings multiples:

• American Express: 13 times.
• Lazard: 12 times.
• KKR: 8.6 times.

If Ariel is right about their enduring franchises and sustainable competitive advantages, these companies should turn out to be excellent purchases five years down the line.

Disclosure: Author is long KKR.