Quarter Ended September 30, 2020
2020 has been quite the year thus far: a pandemic, the shutdown of a global economy, a subsequent collapse in equity markets, social unrest, political dysfunction and environmental catastrophes. Despite this backdrop, the U.S. equity market soared to record highs this summer before September's volatility set. High unemployment, income losses, weaker consumption, indecision in Washington around further fiscal relief and U.S. election uncertainty have blurred the path ahead. Yet, it's important to be mindful that equities continue to receive meaningful support from record levels of stimulus, sustained ultra-low interest rates and the Federal Reserve's decision to target average inflationary growth. While we expect volatility to remain elevated through the new year, we believe the U.S. economy will continue its V-shaped recovery as restrictions ease and we begin to see further positive progress on a vaccine.
For the quarter, Ariel Focus Fund advanced +6.03%, slightly ahead of the +5.59% return posted by the Russell 1000 Value Index but behind the S&P 500 Index's +8.93% gain.
Several holdings in the portfolio advanced considerably this quarter. Producer and marketer of crop nutrients Mosaic Co. (MOS, Financial) advanced in the period as agricultural growing conditions have significantly improved year-over-year. Recent financial results highlighted improving sales volumes across MOS's businesses, an accelerated pace for the company's cost structure transformation and excellent execution throughout the production and supply chain functions. Given these trends and management's optimistic outlook, we continue to believe the company remains well positioned from a risk/reward standpoint.
Leading entertainment company, ViacomCBS Inc. (VIAC, Financial) was also a top contributor in the quarter. Shares are benefitting from solid earnings results driven by revenue growth across advertising, content licensing and further momentum in the company's streaming initiatives. While we recognize cord - cutting impacts fundamentals, we believe premium video content is the most valuable part of the media ecosystem. Based on our sum of the parts analysis, VIAC is currently trading 33% below our estimate of private market value. At today's valuation, we continue to believe VIAC's risk/reward is skewed to the upside.
Additionally, financial advisory and asset manager Lazard Ltd. (LAZ, Financial) advanced in the quarter. As the leader in cross-border M&A advisory in Europe, LAZ has begun to see a broad-based pick up in strategic dialogues, boding well for activity levels in a region where businesses have reopened quicker than the U.S. Furthermore, on the premise that central banks will begin to roll back stimulus in both the U.S. and Europe in 2021, management expects restructuring activity to reach historical levels. Lastly, investor demand for LAZ's quant and fundamental products across its global, multi-regional and emerging market platforms have driven strong gross flows.
By comparison, Apache Corporation (APA, Financial) was the largest detractor from performance in the quarter. We believe this price action runs counter to APA's solid fundamentals. The company reported robust earnings results, driven by higher oil production, a significant decline in operating costs and an announcement of a major oil discovery at the Kwaskwasi-1 well, in Suriname. Furthermore, the company has ample liquidity and a manageable bond maturity profile for the next five years. At current levels, we continue to view the risk/reward favorably.
Shares of Madison Square Garden Entertainment Corporation (MSGE, Financial) also detracted from performance in the quarter. As a result of the COVID-19 pandemic, MSGE's performance venues and Tao Group Hospitality's dining and nightlife locations remain closed; the company cancelled the long running Christmas Spectacular Starring the Radio City Rockettes for the upcoming holiday season. Meanwhile, the company remains committed to bringing the MSG Sphere venue to Las Vegas, however lengthened the construction schedule enabling MSGE to preserve near-term cash burn. We believe the company has ample liquidity to withstand the challenging operating environment until event attendance normalizes, at which point, we think MSGE is positioned to see a more rapid return to higher usage than peers.
Lastly, shares of niche banking services provider, BOK Financial Corporation (BOKF, Financial) declined on mixed earnings results. Robust fee income growth and solid cost containment drove performance during the quarter. However, investor concerns over a larger than expected loan loss provision driven by negative credit migration in the energy loan book resulted in an overhang on shares. In our view, the macro low rate environment will prove to be less important for BOKF than the positive impact of its diversified business model, underwriting disciplines and the experienced management team led by Chairman and majority owner George Kaiser.
We initiated a position in the world's leading provider of thermal cameras, FLIR Systems, Inc. (FLIR, Financial) in the quarter. FLIR's competitive advantages in industrial and defense thermal imaging technology provide an attractive long-term financial profile. The company's scale, combined with a vertically integrated cost structure, with a research and development focus, allows it to price products competitively, earn operating margins above peers and consistently reinvest in innovation. Investor concerns around an industrial recession and defense budget cut fears driven by the pandemic provided us with an entry point to own this niche industry leader, with attractive long-term growth and margin prospects.
We also added a position in a special purpose acquisition company Pershing Square Tontine Holdings Ltd (PSTH, Financial) in the quarter. This SPAC is a newly organized blank check company formed for the purpose of making mergers and acquisitions run by Bill Ackman (Trades, Portfolio).
By comparison we successfully sold out of Northern Trust Corporation (NTRS, Financial) and exited global leader in for-profit education Adtalem Global Education Inc. (ATGE, Financial) and Exxon Mobile Corp (XOM, Financial) to pursue other opportunities.
Short term corrections and market volatility remain headwinds in the near-term. FAANG1 stocks have dominated the rally in recent months and their concentration and elevated valuations, as well as the U.S. election outcome poses risks to the broader market. While meaningful to current market sentiment and conversation, we view these risks as short-term noise within the context of our long- term investment horizon. We retain a "glass half full" outlook and believe the economy will continue its recovery with the support of a dovish Fed, easing restrictions and positive COVID-19 vaccine developments. Meanwhile, we stand ready to take advantage of any pull backs in the market on negative news. We strongly believe the dedicated, contrarian, patient investor that stays the course and consistently owns differentiated business models with solid competitive positioning and robust balance sheets will deliver superior returns over the long-run.
- FAANG is comprised of Facebook Inc., Apple Inc., Amazon,com Inc., Netflix Inc. and Alphabet Inc.
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.
