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John Rogers' Ariel Fund 1st-Quarter Commentary

Discussion of markets and holdings

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Apr 19, 2022
Summary
  • Ariel Fund traded -5.11% lower in the quarter.
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All three major U.S. indices kicked off 2022 in the red, with stocks delivering their worst quarter in two years. As the global economy seeks to place the pandemic in its rear-view mirror, Russia’s invasion of Ukraine introduced new shocks as markets were already looking to process the effects of soaring inflation and a hawkish pivot by the Fed. Ripple effects from higher energy prices have extended to other commodities, increasing the price of food and further disrupting already rattled supply chains. Although uncertainty is high and volatility will likely remain elevated, we view these near-term risks as noise within the context of our long-term investment horizon. Against this backdrop Ariel Fund traded -5.11% lower in the quarter, trailing the Russell 2500 Value Index’s loss of -1.50% and ahead of the Russell 2500 Index, which returned -5.82%.

Several stocks in the portfolio had strong returns in the quarter. Entertainment holding company, Madison Square Garden Entertainment Corp. (

MSGE, Financial) outperformed in theperiod, as the company stands to benefit from the reopening and pent-up demand for experiential leisure. Notably, management believes the entertainment bookings business is poised to deliver a record year, with the schedule pacing 50% higher than pre-pandemic levels. MSGE’s assets also continue to drive consumer engagement and incremental advertising dollars, particularly with Online Sports Betting (OSB) growing in New York. Looking forward, we remain bullish on digital access to sports, as well as the opportunity at the Sphere, its Las Vegas property which is expected to be complete in 2023. In our view, the underlying value of MSGE’s physical assets coupled with our conviction around management’s expertise make this an attractive opportunity.

Shares of rebranded leading entertainment company Paramount Global (

PARA, Financial), (formerly ViacomCBS Inc.) alsoincreased on robust top -line growth across all business segments. PARA added record global streaming subscribers in the quarter extending its reach to over 56 million subscriptions. Pluto TV also grew its reach to over 64 million active users. Accordingly, PARA’s bottom-line continued to reflect investment in global content, distribution and market expansion. Also in the quarter, PARA strengthened its financial position through the non-core dispositions of CBS Studio Center in Los Angeles and Black Rock office building in New York City. PARA also re-segmented its financial reporting to be more shareholder friendly. We believe PARA’s investment plans and increased financial transparency will continue to be rewarded by investors. At current levels, the company’s risk/reward is skewed sharply to the upside.

Additionally, following Russia’s invasion of Ukraine, shares of premiere oil services company Core Laboratories NV (

CLB, Financial) accelerated alongside most energy names. The ongoing war has disrupted traditional oil and gas supply chains, as well as changed global logistical patterns. CLB’s stock was bid up in anticipation of the industry re-aligning global supply to meet strong demand for oil and natural gas despite the conflict.

Alternatively, several positions weighed on performance during the period. Leading manufacturer and distributor of floorcovering products, Mohawk Industries Inc. (

MHK, Financial) traded lower in the period. The top-line earnings beat was offset by weaker margins largely due to input cost inflation. Notably, demand remains firm supporting the implementation of further price increases. Also in the quarter, MHK authorized an additional return of capital to shareholders via buybacks. We remain encouraged by strong residential new construction and remodeling spend as well as the recovery in commercial markets. We believe the company will continue to benefit from global and capacity expansion, as well as end-market growth. At current levels, MHK is trading at a 57% discount to our estimate of private market value.

Financial advisory and asset manager Lazard Ltd. (

LAZ, Financial) also weighed on relative performance in the period due to net outflows and market depreciation. Cyclical upside to merger and acquisition activity has become more difficult to gauge as the outlook for deal activity has been in a state of flux since Russia invaded Ukraine. Uncertainty is especially heightened in Europe where LAZ is overweight relative to other asset managers. Aside from geopolitical concerns and volatile global markets, we believe LAZ’s business fundamentals remain strong and the stock price currently represents a healthy discount to our private market value estimate.

Lastly, branded home improvement and building products manufacturer Masco Corporation (

MAS, Financial) declined following mixed earnings results and guidance below street expectations. Although the top-line came in ahead of expectations, the bottom-line missed as supply chain challenges, inflation headwinds and a spike in freight and logistics costs weighed on margins. MAS has implemented incremental price increases with the goal of neutralizing additional cost pressure. Management also continues to utilize its strong cash position to deploy capital to shareholders through the use of dividends and share repurchases. Near term, we believe MAS’ leading portfolio of branded, lower ticket, repair and remodel-oriented products that serve the do -it yourself and professional markets is well positioned to capitalize on favorable housing fundamentals. Going forward, 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.

We did not initiate any new positions in the quarter. By comparison, we successfully exited broadcast, digital media and marketing services company TEGNA, Inc. (

TGNA, Financial) upon the acquisition announcement by StandardGeneral.

Geopolitical instability, surging inflation, tighter monetary policy, a sharp run up in commodity prices as well as supply chain constraints present risks on a go forward basis. It is in times like these where an active investment manager has the opportunity to prove its merit. This is when we rely on the Ariel playbook and execute. We are diligently assessing the resilience of our portfolio companies to effectively navigate high inflation and rising rates. In the new world order, we believe the long-neglected value stocks are poised to outperform growth. Knowing today’s decisions will drive years of future returns, we remain laser-focused on identifying undervalued, quality companies with unique products or services, durable cost advantages, capable management teams and robust balance sheets. We firmly believe the 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 March 31, 2022 the average annual returns of Ariel Fund (investor class) for the 1-, 5-, and 10-year periods were +3.51%, +9.76%, and +12.23%, respectively.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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