Quarter Ended December 31, 2020
The S&P 500 and MSCI ACWI closed 2020 at all-time highs—a stunning outcome, few would predict amidst a global pandemic. Record levels of fiscal stimulus, ultra-low interest rates and low-inflation collectively set the tempo to an equity anthem. While growth trounced value on a full year basis, a shift occurred in the fourth quarter. Value bested growth, small cap issues outperformed their large cap brethren and investors increased their appetite for risk, favoring emerging markets over developed peers and U.S. equities.
For the quarter, Ariel Fund advanced +31.56%, significantly outperforming both the similarly positioned Russell 2500 Value Index's gain of +28.51% and the Russell 2500 Index, which returned +27.41%.
Some holdings in the portfolio advanced considerably this quarter. Producer and supplier of sand U.S. Silica Holdings, Inc. (SLCA, Financial) was a top performer in the quarter on better than expected earnings. Industrial & Specialty Product revenue and profits rebounded sharply. Cost reduction measures in the Oil & Gas segment, as well as rising sand volumes due to increasing frac activity and well completions also contributed to returns. Looking ahead, we expect SLCA to continue to benefit from its proximity to last-mile logistics, as well as gain market share from challenged frac sand competitors. Additionally, SLCA remains in a solid position from a liquidity perspective. They do not have any maturities due until 2025 and the balance sheet, as well as cash on hand remain sound. At current trading levels, we believe SLCA is well positioned from a risk/reward standpoint.
After being a bottom contributor last quarter, shares of real estate expert Jones Lang LaSalle (JLL, Financial) reversed course and traded higher. Despite headwinds for commercial real estate transaction activity, the company continues to prudently manage expenditures to preserve cash and delivered margin expansion in the quarter. We believe the company's diverse business model and annuity like non-transaction revenue mix, such as corporate outsourcing, will continue to help offset weakness in the cyclical leasing business until wide-spread distribution of the vaccine. For instance, clients are engaged in discussions around bringing employees back to their office spaces, potential space re-configurations, increased cleaning and security and more advisory and technology-led solutions. At current levels, JLL is trading at a 9% discount to our estimate of private market value.
Additionally, toy manufacturer Mattel, Inc. (MAT, Financial) advanced in the period on better than expected top and bottom line results. Demand at retail exhibited the resilience of the company's brands, while e-commerce continued to build momentum heading into the holiday season. MAT also delivered gross margin improvement for the third sequential quarter, announced plans to pay down debt with excess free cash flow and reissued full year 2020 guidance. Looking ahead, we believe the company has sufficient liquidity to navigate the COVID-19 operating environment and remain encouraged by management's successful execution on the Structural Simplification Plan and cost savings initiatives. We have conviction in the leadership team's ability to transform MAT into an IP-driven, high performing toy company.
There were a few notable performance detractors in the quarter. Branded home improvement and building products manufacturer Masco Corp (MAS, Financial) was the greatest detractor from relative performance in the period. We believe this price action runs counter to the strong fundamentals in the business. MAS delivered another quarter of strong results, as both the plumbing and decorative architectural products segments significantly outperformed consensus. Management also issued guidance above Wall Street expectations and announced the resumption of share buybacks. Near term, we believe MAS is well positioned to capitalize on growing interest in do-it-yourself home enhancement. Longer term, we expect the company to enhance its operating profitability, as it continues to benefit from scale, technological know-how and the positioning of its supply chain.
Leading manufacturer of consumer food products J.M. Smucker Co. (SJM, Financial) also weighed on performance in the period. Although SJM delivered an earnings beat and held an analyst day where it highlighted an improved focus on execution of key priorities and provided aspirational long-term financial targets, investors remain on the sidelines. In our view, achievement of the articulated operating and earnings goals would drive a re-rating of the stock in-line with its packaged food peers. At today's valuation, we continue to see the risk/reward skewed to the upside.
Lastly, title insurer First American Financial Corporation (FAF, Financial) detracted from relative performance, although shares traded higher on an absolute basis. FAF delivered solid quarterly results highlighted by record pre-tax title margin, strong order trends in both the purchase and refinance businesses and continued cost efficiencies. The firm also initiated a process to sell its non -core property and casualty business, increased its dividend and announced an expansion of the share repurchase program. Looking forward, we believe the market continues to underappreciate FAF's scale and operating leverage and think there continues to be a long runway for earnings and intrinsic value growth.
We did not add new holdings or eliminate any positions during the quarter.
Although concerns over rising coronavirus infections have been overshadowed by positive vaccine developments, the widespread pain on Main Street, including pronounced unemployment, battered small businesses, social unrest and political dysfunction remain headwinds. We view such risks as short-term discord within the context of our long-term investment horizon. We retain a "glass half full" outlook and believe the economy will continue to receive meaningful support from a dovish Fed, easing restrictions and the promise that vaccines will pave the way to a return to normalcy. 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 businesses with solid competitive positioning and robust balance sheets will deliver superior returns over the long-run.
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. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com. For the period ended December 31, 2020 the average annual returns of Ariel Fund (investor class) for the 1-, 5-, and 10-year periods were +10.02%, +9.66%, and +10.04%, respectively.
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.
