Investing in small- and mid- cap stocks is riskier and more volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Ariel Fund often invests a significant portion of its assets in companies within the financial services and consumer discretionary sectors, and its performance may suffer if these sectors underperform the overall stock market.
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. For the period ended June 30, 2015, the average annual total returns of Ariel Fund (Investor Class) for the 1-, 5- and 10 -year periods were +9.79%, +19.15% and +7.46%, respectively. Ariel Fund’s Investor Class shares had an annual expense ratio of 1.03% for the year ended September 30, 2014. Performance data current to the most recent month-end for Ariel Fund may be obtained by visiting our website, arielinvestments.com.
Quarter Ended June 30, 2015
For most of the second quarter, stocks were up fairly nicely at home and abroad—until the final few sessions. As news out of Puerto Rico and especially Greece worsened, stocks fell sharply. In the last two trading days of the quarter, the foreign stock MSCI EAFE Index dropped -2.97%, the U.S. large-cap S&P 500 Index fell -1.81%, and the U.S. small-cap Russell 2000 Index retreated -2.01%. To our minds, these sell -offs were not based on economic exposures but on an expansive sense of risk and, ultimately, on fear. The volatility extended to other asset classes: long U.S. bonds were up roughly +1.5% while high-yield bonds were off about -0.5% in those two days. Altogether, it meant most major stock indexes we track had roughly flat returns.
This quarter, Ariel Fund fell -2.26% and finished behind the Russell 2500 Value Index’s -1.27% slide, as well as the -1.20% return of the Russell 2000 Value Index.
Some of our holdings had good returns for the quarter. Motorsport company International Speedway Corp. (ISCA, Financial) gained +13.23% on strong earnings. Revenue was higher than expected and taxes were unexpectedly lower, so earnings per share (EPS) were above the 29 cents expectation at 36 cents. The crowd believed race fans had cut back permanently, but we always thought they would return as income climbed—and the company was able to charge 2.3% more this year than last as support for our thesis. In addition, financial advisory and asset manager Lazard Ltd (LAZ, Financial) returned +7.65% on an earnings beat. Revenues were surprisingly high, given the modest number of deals, but operating leverage drove a strong earnings increase. The company had fairly low expectations when we first purchased it and has done quite well, strongly outperforming on a fundamental basis.
Other holdings slid in the volatile three-month period. Communications products distributor Anixter Intl Inc. (AXE, Financial) declined -14.42% due to short-term weakness. Specifically, the company had weak margins in the first quarter and also lowered organic growth guidance. Wall Street lowered its expectations for the year, which was appropriate. We, however, focus on the long term and see these issues as temporary. Also, natural resources company Contango Oil & Gas Co. (MCF, Financial) dropped -44.23% after a disappointing earnings report. The market had expected a per-share loss of -$0.69, but due to lower commodity prices and decreased production, Contango lost -$0.98 instead. We think short-term issues have caused the market to deeply undervalue this franchise.
During the quarter, we initiated one new position and did not eliminate any holdings in Ariel Fund. We bought shares of Mattel, Inc. (MAT, Financial), a leading quality toy company that we believe has a sustainable competitive advantage. A previous Ariel holding, we used to own Mattel from 2004-2007, and again from 2010-2012. Its trustworthy brand name has historically translated into an ability to charge customers a premium. Although the company has struggled somewhat recently, a new CEO was announced in April, and he has a new strategy. While it is not an actively initiated position, we gained a new holding via a corporate action during the quarter. The media company formerly known as Gannett Co., Inc. (GCI, Financial), has spun off its publishing business, and the remaining company is now called TEGNA, Inc. (TGNA, Financial). As former Gannett shareholders, we now own shares of TEGNA, which focuses on television broadcasting and digital businesses, and shares of “new” Gannett, which is the publishing company.
As we write, markets are particularly volatile, so there is no telling which way things will turn. We could see the current turmoil transform into a one- or two -week blip or the beginning of a more extended slide. As we have noted before many times, we think nobody can time the market with any reasonable consistency. So we have no special insight into where stocks are heading the rest of this month or quarter or even year. We do, however, have a fairly strong point of view that markets are overreacting. To be sure, the response is more muted than in 2011 and 2012, when there were reasonable worries about contagion. But at this point, the possibility of Greece exiting the European Union or Puerto Rico defaulting on its bonds has been very well-signaled and appropriately contained in advance. We do not think either entity has the power to disrupt the global economy, especially the U.S. economy. Therefore, if the market follows fundamentals, we think a fairly quick recovery is in order.
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.
As of 06/30/15, International Speedway Corp. 3.5% of Ariel Fund; Lazard Ltd 4.7%; Anixter Intl Inc. 2.8%; Contango Oil & Gas Co. 0.9%; Mattel, Inc. 1.6%; Gannett Co., Inc. 0.6%; and TEGNA, Inc. 2.7%. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund.
The Russell 2500™ Value Index measures the performance of the small- to mid-cap value segment of the U.S. equity universe. It includes those Russell 2500 companies with lower price/book ratios and lower forecasted growth values. The Russell 2000® Value Index measures the performance of the small- cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price/book ratios and lower forecasted growth values. The Russell 2000® Index is a subset of the Russell 3000® Index, representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities on the basis of a combination of their market cap and current index membership. Russell® is a trademark of Russell Investment Group, which is the source and owner of the Russell Indexes’ trademarks, service marks and copyrights.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current prospectus or summary prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or visit our website, arielinvestments.com. Please read the prospectus or summary prospectus carefully before investing. Distributed by Ariel Distributors LLC, a wholly owned subsidiary of Ariel Investments LLC.
