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John Rogers' Ariel Fund 2nd-Quarter Commentary

Discussion of markets and holdings

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Sydnee Gatewood
Jul 15, 2021

Summary

  • Ariel Fund advanced +5.52% in the quarter, ahead of both the similarly positioned Russell 2500 Value Index’s gain of +5.00% and the Russell 2500 Index, which returned +5.44%.
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Quarter Ended June 30, 2021

Markets worldwide continued their upward trajectory in the second quarter. Record levels of fiscal support, pent-up consumer demand and rising COVID-19 vaccination rates continue to fuel the global economic recovery. As the re-opening progresses, implications for inflation and the timing of rate hikes has ignited investor anxiety. While we expect volatility to elevate, we view such jitters as short-term noise within the context of our long-term investment horizon. Against this backdrop, Ariel Fund advanced +5.52% in the quarter, ahead of both the similarly positioned Russell 2500 Value Index’s gain of +5.00% and the Russell 2500 Index, which returned +5.44%.

Several stocks in the portfolio had strong returns in the quarter. Television broadcaster and magazine advertiser, Meredith Corporation (

MDP, Financial) advanced following theacceptance of an acquisition bid from Gray Television for its 17 local television stations. Immediately prior to the acquisition, MDP plans to spin off its existing National Media Group to create a pure-play business focused on digital and consumer opportunities across the company’s lifestyle media brands. We view this transaction as a positive for both companies as Gray will become the second largest local TV broadcaster in the U.S. and Meredith will be able to focus on its digital and consumer-focused assets further unlocking value for the business.

Asset manager Janus Henderson Group Plc (

JHG, Financial) also traded higher in the period as earnings results showcased financial discipline. Signaling further confidence in its operating environment, management continued to return excess cash to shareholders through share buybacks and by increasing its quarterly dividend. At today’s valuation,we continue to believe JHG’s risk/reward is skewed to the upside.

In addition, alternative asset manager, KKR & Co. L.P. (

KKR, Financial) advanced following a solid quarter of improving fundamentals, highlighted by strong fee related and after-tax distributable earnings, a material increase in assets under management as well as new capital raised and invested. Management also increased the dividend signaling further confidence in its operating environment. Looking ahead, we continue to like KKR’s fundraising outlook and improved visibility in near-term carry and investment income.

Alternatively, several positions weighed on performance during the period. Global leader in for-profit education, Adtalem Global Education (

ATGE, Financial) traded lower throughout the quarter.Shares were impacted by the announcement of President Biden’s American Families Plan which includes a proposal for two years of “free” community college. Mixed quarterly earnings results and the resignation of the company’s Chief Financial Officer, General Counsel and long-time board member also weighed on performance. Nonetheless, ATGE reiterated full year revenue guidance, raised earnings-per-share expectations, and remains confident in its attractive post-acquisition earnings power. While investors remain skeptical of the near-term backdrop, we believe ATGE is on the path to be number one in undergrad and graduate nursing enrollment in the U.S. and the largest producer of African-American MDs, PhDs and nurses in the country.

Specialty cutting tool insert maker, Kennametal, Inc. (

KMT, Financial) also weighed on results in the period, as investors were concerned about near-term challenges for automotive production due to semiconductor constraints. In our view, these headwinds are short-term in nature and we remain focused on KMT’s improving sales and free cash flow profile, solid operating discipline, as well as its continued execution on simplification/modernization initiatives. We believe the scale, scope, quality, low-cost production and the value proposition of the cutting tools themselves will continue to mitigate pricing pressure in recovering markets. Additionally, KMT is executing on its strategic plan to improve economies of scale and generate margin improvement, while gaining share in the marketplace.

Lastly, shares of owner and operator of regional sports and entertainment networks, MSG Networks, Inc. (

MSGN, Financial) came under pressure following the announcement that it would be acquired by Madison Square Garden Entertainment Corp. (MSGE). We own both sides of this trade and in our view the combined company will lead to a stronger liquidity position to fund current and future growth initiatives, including the MSG Sphere in Las Vegas, as well as support opportunities in sports gaming such as specialized broadcasts, licensing, branding, and sponsorships on a go forward basis. Additionally, the combined company is expected to realize meaningful tax efficiencies with MSGE’s Net Operating Losses and plans to accelerate the depreciation recognition of its Las Vegas Sphere.

Also, in the quarter we initiated a position in leading provider of automated security solutions ADT, Inc. (

ADT, Financial) in the period. In our view, ADT’s brand and national presence in the security industry is unmatched, resulting in leading market share, a high recurring revenue base and attractive free cash flow generation. While investors remain concerned that do-it-yourself competition will erode the installation and technology-driven moat around the business, we believe ADT is well positioned to benefit from strategic partnerships, such as Google and secular growth of smart home adoption. By comparison, we successfully exited our position in U.S. Silica Holdings Inc. (SLCA, Financial) on valuation.

Effective vaccines, easy money policies, improving consumer confidence and positive corporate earnings growth expectations have the economy on track for a prolonged rebound in the second half of 2021. While we acknowledge valuations are getting frothy, investor sentiment has not yet reached euphoric levels. Meanwhile, it is in times like these where an active investment manager proves its merit by ignoring market enthusiasm and searching instead for quality companies with dominant franchises, capable management teams and robust balance sheets whose inevitable weakness are reflected in its price per share. Given our “slow and steady” approach, we remain confident in our current positioning, especially with our portfolios trading at a discount relative to the indices. We strongly believe the dedicated patient investor that stays the course and consistently owns differentiated businesses at reasonable prices will deliver superior returns over the long run.

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.

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 June 30, 2021 the average annual returns of Ariel Fund (investor class) for the 1-, 5-, and 10-year periods were +73.45%, +15.40%, and +11.97%, respectively.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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