The upward trajectory in global equity markets was interrupted in the third quarter by investor anxiety centered on the COVID-19 Delta variant, inflation, supply chain constraints and central bank tapering. While we expect volatility to remain elevated, we believe investors focused on underlying long-term business fundamentals will likely be rewarded. Against this backdrop, Ariel Fund traded -0.17% lower in the quarter, outperforming both the similarly positioned Russell 2500 Value Index’s decline of -2.07% and the Russell 2500 Index, which returned -2.68%.
Several stocks in the portfolio had strong returns in the quarter. Shares of real estate expert Jones Lang LaSalle (JLL, Financial) traded higher on better than anticipated earningsgrowth led by a broad recovery across the firm’s transaction-based businesses. Strong capital market and leasing activity drove management to meaningfully raise the company’s full year EBITDA margin outlook. Meanwhile, JLL continues to prudently manage expenditures and is returning excess capital through share repurchases. At current levels, we remain optimistic about JLL’s continued value proposition for key stakeholders.
Television broadcaster and magazine advertiser, Meredith Corporation (MDP, Financial) advanced sharply in late September onnews the company was in advanced discussions to sell its publishing segment to Barry Diller’s digital media company, IAC/InterActiveCorp. Subsequent to the end of the quarter, the acquisition was publicly announced, and the deal is incremental to MDP’s previously accepted acquisition bid from Gray Television for the other half of the company’s assets---17 local TV broadcast stations.
Marketing communication company, Interpublic Group of Companies, Inc. (IPG, Financial) also advanced in the period on top andbottom-line earnings beat. Notably, IPG delivered a stronger than expected revenue mix between Technology and Healthcare relative to its peer group, solid cost containment and margin expansion. Meanwhile, the company continued to focus on de-levering its balance sheet. In our view, IPG’s Acxiom acquisition for data has proven to be a winner, helping the company increase their revenue across all eight major advertising sectors by industry. We believe these results continue to demonstrate the strength and resiliency of the business model and expect IPG to be a beneficiary of increasing advertising and marketing budgets across an improving global economy.
Alternatively, several positions weighed on performance during the period. Entertainment holding company, Madison Square Garden Entertainment Corp. (MSGE, Financial) continued to weigh onrelative results in the quarter. Shares have been under pressure as investors unhappy with the acquisition of MSG Networks, Inc. cycle out of the name. Other investors remain on the sidelines over concerns related to the rising cost of the build-out for the Sphere arena in Las Vegas. Previously, we held positions in both companies prior to their combination and the recent transaction has not changed our thinking. Regarding the Sphere, we are confident in management’s ability to deliver excess returns on the project, much like they have done with The Garden in New York City and The Forum in Los Angeles. In our view, the underlying value of MSGE’s physical assets coupled with our conviction around their expertise make this an attractive opportunity. At current levels, MSGE is trading at a 47% discount to our estimate of private market value.
Leading provider of automated security solutions ADT, Inc. (ADT, Financial) also traded lower in the period. We believe this priceaction runs counter to the company’s improving long-term fundamental outlook. Despite investor concerns over do-it-yourself competition, ADT’s investment in customer acquisition continues to pay off, showcased by this most recent quarter’s excellent gross recurring monthly revenue growth. Longer term, we believe ADT’s industry-leading brand and national presence, coupled with a nascent partnership with Google, positions it to be a prime beneficiary of growing demand for smart home technologies, including fully monitored residential security.
Lastly, leading global provider of data measurement and analytics to the media industry, Nielsen Holdings PLC (NLSN, Financial) underperformed in the period amidst severalnegative headlines. Most notably, the Media Ratings Council (MRC) suspended the company’s national ratings accreditation until the company can fully rebuild its ratings panel, which was negatively impacted by pandemic-related restrictions. Not only do we believe this to be a severe overreaction, but it is also backward looking – Nielsen should be reaccredited within months, quarterly results continue to improve as the economy recovers and the company’s next generation measurement product, Nielsen ONE, remains on track to begin rolling out next year. Longer term, as fragmentation across the media industry continues to increase, we believe NLSN’s independent audience measurement of what people are watching across various platforms will be more important than ever.
We initiated three new positions in the quarter. We added a leading supplier of automatic-dimming mirrors for the automotive industry, Gentex Corporation (GNTX, Financial). With over 90% market share and a long history of technological innovation and manufacturing capability, the company consistently outgrows the broader industry, sports best-in-class operating margins, and generates attractive free cash flows. Recently, the stock has underperformed due to broad- based supply chain concerns and the disruption of global automotive production. We view these issues as overblown and see this as an opportunity to own a high-quality niche franchise with excellent and improving growth prospects, well positioned to potentially benefit from growing market adoption of its essential technologies.
We also purchased operator of professional football club, Manchester United Plc. (MANU, Financial). The team plays in the EnglishPremier League (EPL), the most watched professional sports league in the world. Unlike most sports franchises, MANU leverages its global brand to drive a larger revenue base enabling the acquisition of top talent which has proven to drive strong league performance over the long-term. MANU also distributes and broadcasts live football content directly and indirectly through partners, owns and operates Old Trafford Stadium, as well as engages in sponsorships, merchandising and product licensing. Pandemic related revenue pressures and investor concerns surrounding media rights gave us the opportunity to build a position in the stock at a meaningful discount to our assessment of intrinsic value.
And we re-initiated a position in pure-play professional sports content company Madison Square Garden Sports Corp (MSGS, Financial). As the owner of two storied sports franchises in the biggest US market, the New York Knicks (NBA) and Rangers (NHL), we believe MSG controls scarce and valuable content that should continue to grow and command a premium as the economic reopening continues.
We successfully exited leading manufacturer and supplier of acoustic components to smartphones, home devices and hearing aid manufacturers, Knowles Corporation (KN, Financial) on valuation and MSG Networks Inc. (MSGN, Financial) upon its acquisition by Madison Square Garden Entertainment (MSGE, Financial).
The COVID-19 Delta variant, supply chain shortages, looming political battles over infrastructure spend, the debt ceiling and potential changes in tax rates present risks on a go-forward basis. However, we remain cautiously optimistic the post - lockdown recovery will continue, albeit at a slower pace, due to improving consumer confidence, positive corporate earnings growth expectations, and accelerating vaccination rates. We believe high valuations, rising inflation, and less accommodative monetary policy should be top of mind for investors. The best offense is often a good defense. Ignoring market noise and searching instead for quality companies with dominant franchises, capable management teams and robust balance sheets should help insulate on the downside. Given our “slow and steady” investment approach, confidence in our current positioning remains high. As we head into the final quarter of 2021, we firmly believe the dedicated patient investor that stays the course and consistently owns differentiated businesses at reasonable prices will deliver strong 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.
